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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

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|(Mark One)                                  |                                                                                         
|------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2002
|OR                                         
|o                                           | 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 |  | Exact name of registrants as specified in their charters, state of
incorporation, address of principal executive offices, and telephone number |  | I.R.S. Employer
Identification Number
|---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------
|0-22164                |  | RFS Hotel Investors, Inc.
A Tennessee Corporation
850 Ridge Lake Boulevard, Suite 300
Memphis, Tennessee 38120
Telephone (901) 767-7005        |  | 62-1534743                           
|333-84334              |  | RFS Partnership, L.P.
A Tennessee Partnership
850 Ridge Lake Boulevard, Suite 300
Memphis, Tennessee 38120
Telephone (901) 767-7005            |  | 62-1541639                           

Indicate
by check mark whether each Registrant (i) 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 (ii) has been subject to such filing requirements for the past
90 days.    ý Yes    o No

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
each 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.    o

Indicate
by check mark whether RFS Hotel Investors, Inc. is an accelerated filer (as defined in Exchange Act Rule 12b-2). /x/ Yes / / No.
Indicate by check mark whether RFS Partnership, L.P. is an accelerated filer (as defined in Exchange Act
Rule 12b-2).    ý Yes    o No

The
aggregate market value of the voting and non-voting common equity held by non-affiliates of RFS Hotel Investors, Inc. was approximately $385,411,212
based on the last sale price in the New York Stock Exchange for such stock on June 28, 2002.

The
number of shares of RFS Hotel Investors, Inc. Common Stock, $.01 par value, outstanding on March 19, 2003 was 28,516,733. The number of units of RFS Partnership, L.P.
outstanding on March 19, 2003 was 30,938,585 (92% of which were held by RFS Hotel Investors, Inc.).

This combined Form 10-K is filed separately by two registrants: RFS Hotel Investors, Inc., issuer of publicly traded common stock on the
New York Stock Exchange, and RFS Partnership, L.P., issuer of public debt. Information contained herein relating to either individual registrant is filed by such registrant solely on its own behalf.
Each registrant makes no representation as to information relating exclusively to the other registrant.

Documents Incorporated by Reference

Portions of the RFS Hotel Investors, Inc. Proxy Statement for the 2003 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission are incorporated into Part I and Part III.

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PART I

Item 1.Business

RFS Hotel Investors, Inc. ("RFS"), is a publicly held hotel real estate investment trust which, at December 31, 2002, owned interests in 57 hotels
with 8,271 rooms located in 24 states (collectively the "Hotels") through its approximate 92% equity interest in RFS Partnership, L.P. (the "Operating Partnership"). At December 31, 2002, third
party limited partners owned the remaining 8% of the Operating Partnership. RFS is the general partner in the Operating Partnership. The Operating Partnership is the issuer of public debt. Because RFS
is the issuer of publicly held common stock and the Operating Partnership is the issuer of publicly held debt, both entities are required to file Form 10K's, either separately or combined. This
Form 10K represents a combined Form 10-K for both RFS and the Operating Partnership. RFS, the Operating Partnership, and their subsidiaries are herein referred to,
collectively, as the "Company."

The
Company has grown from owning seven hotels with 1,118 rooms in five states at the time of the Company's initial public offering in August 1993 to owning interests in 57 hotels
with 8,271 rooms in 24 states at December 31, 2002. Many of the Company's hotels are located in attractive metropolitan areas or growing secondary markets and are well located within these
markets. All but two of the Company's hotels are operated under franchises from nationally recognized franchisors such as Marriott International, Inc., Hilton Hotels Corporation, Starwood
Hotels & Resorts, Inc. and Six Continents PLC. For the year ended December 31, 2002, the Company generated approximately 95% of the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA"), as defined herein (see "Management's Discussion and Analysis of Financial Condition and Results of OperationsFunds From Operations and EBITDA,"
from hotels operating under nationally recognized brands from these franchisors.

For
the year ended December 31, 2002, the Company generated revenues of $198.9 million and EBITDA of $65.9 million. In 2002, the Company received 36% of its EBITDA
from full service hotels, 37% from extended stay hotels and 27% from limited service hotels. The Company received 59% of its EBITDA in five states (California (30%), Florida (10%), Texas (9%),
Michigan (5%) and Illinois (5%)).

The
following summarizes additional information for the 57 hotels owned at December 31, 2002:

Franchise Affiliation

Hotel Properties

Rooms/Suites

2002 EBITDA(in thousands)Full Service Hotels:Sheraton

4

864

$
8,056Holiday Inn

5

954


7,210Sheraton Four Points

2

412


3,356Doubletree

1

221


2,014Independent

2

331


1,848Hilton

1

234


1,36315

3,016


23,847Extended Stay Hotels:Residence Inn by Marriott

14

1,852


21,460TownePlace Suites by Marriott

3

285


2,220Homewood Suites by Hilton

1

83


53618

2,220


24,216


2

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Limited Service Hotels:Hampton Inn

17

2,112


12,406Holiday Inn Express

5

637


3,408Courtyard by Marriott

1

102


823Comfort Inn

1

184


81324

3,035


17,450Total

57

8,271

$
65,513


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The
following summarizes the number of hotels owned for the periods presented:

2002

2001

2000Hotels owned at beginning of years

58

60

62Sales of hotels

(1
)
(2
)
(2
)Hotels owned at end of years

57

58

60


During
2000, the Company sold the 280-room Hawthorn Suites in Atlanta for $20.8 million, resulting in a nominal gain, and the 124-room Hampton Inn in
Warren, Michigan for $5.4 million, resulting in a gain on the sale of $0.7 million. Sales proceeds were used to finance the Hilton lease termination on January 1, 2001.

During
2001, the Company sold the 131-room Hampton Inn in Plano, Texas for $5.5 million, resulting in a loss on sale of approximately $1.0 million and the
135-room Comfort Inn in Farmington Hills, Michigan for $6.6 million, resulting in a gain on sale of approximately $1.1 million. The net proceeds were used to reduce
borrowings under the Company's Line of Credit.

In
2002, the Company sold the 153-room Comfort Inn in Fort Mill, South Carolina for $3.25 million, resulting in a loss on sale of approximately $3.8 million.
The net proceeds were used to reduce borrowings under the Company's Line of Credit.

At
December 31, 2002, the Company leased five hotels to two third-party lessees. Fifty hotels are managed by Flagstone Hospitality Management LLC ("Flagstone") and the remaining
seven hotels are managed by four other third-party management companies.

Termination of Leases and Related Agreements with Hilton

Under the REIT Modernization Act (the "RMA") that became effective January 1, 2001, the Company is permitted to lease its hotels to wholly-owned taxable
REIT subsidiaries of the Company ("TRS Lessees"), provided that the TRS Lessees engage a third-party management company to manage the hotels. Effective January 1, 2001, the Company terminated
its operating leases, management contracts and related ancillary agreements with a wholly-owned subsidiary of Hilton Hotels Corporation ("Hilton") for approximately $65.5 million. This transaction
represents the cancellation of executory contracts that extended through 2012 and substantially all of the termination payment was recorded as an expense on January 1, 2001. The cancellation of
these agreements entitles the TRS Lessees to retain the operating profits or losses from hotels, which previously accrued to Hilton under these contracts and in the opinion of management, gives the
Company the following advantages over its prior third-party structure:



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Effective
January 1, 2001, the TRS Lessees entered into new management contracts with Flagstone, which is owned by Interstate Hotels & Resorts, Inc., a leading
independent hotel management company.

In
connection with the termination of the leases and related agreements, the Company redeemed 973,684 shares of its Series A Preferred Stock owned by a subsidiary of Hilton for
$13 million, which resulted in a gain on redemption of $5.1 million that was included in net income available to common shareholders in the first quarter of 2001.

The
aggregate $73 million of payments to Hilton ($60 million lease termination expense plus $13 million to repurchase the Series A Preferred Stock, plus
related expenses), were financed by:



Competitive Strengths

The Company believes that it is distinguished by the following competitive strengths:

Diversified Asset Base.The Company's hotel portfolio is diversified by brand, geography and market segment. The Company's
hotels are operated under leading brands including Sheraton, Residence Inn by Marriott, Hilton, Doubletree, Holiday Inn, Hampton Inn, and Homewood Suites by Hilton. The Company owns hotels in 24
states. For the year ended December 31, 2002, the Company generated 30% of its EBITDA in California, 10% in Florida, 9% in Texas, 5% in Michigan, 5% in Illinois and the remaining 41% in 19
other states, and the Company generated 36% of its EBITDA from full service hotels, 37% from extended stay hotels and 27% from limited service hotels. No single hotel accounted for more than 6% of the
Company's EBITDA for the year ended December 31, 2002.

Conservative Balance Sheet.The Company believes there is a competitive advantage in limiting the use of leverage and
preserving a conservative capital structure. The Company is committed to maintaining financial flexibility, which the Company believes may allow it to pursue selective acquisitions and attractive
renovation, rebranding and redevelopment opportunities. As part of this commitment, the Company's board of directors presently has a policy limiting the amount of total debt the Company will incur to
an amount not in excess of 45% of its investment in hotel properties, at cost. Furthermore, management's long-term compensation is based, in part, on maintaining leverage below this target
ratio. At December 31, 2002, the Company's ratio of total debt to investment in hotel properties, at cost, as defined by the Company, was 37%. Additionally, the Company's ratios of debt to
EBITDA and EBITDA to interest expense for the year ended December 31, 2001 were 4.4x and 2.6x, respectively.

Disciplined Capital Rationing.The Company is committed to a selective acquisition strategy which entails acquiring
properties only if they meet at least one of the Company's specific criteria and can be purchased at reasonable multiples to historical cash flow. As a result, the Company has achieved modest returns
on investments on the Company's hotel properties. For the years ended December 31,
2002, 2001 and 2000, the un-leveraged return on investment for our comparable hotels was 8.7%, 11.3% and 13.4%, respectively. Based upon the Company's 37% to 40% leverage and its 7.8% to
8.5%

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average borrowing costs in those years, the Company's leveraged return on investment was 8.8%, 13.4% and 16.8%, respectively.

Favorable Corporate Structure.As a result of the RMA, effective January 1, 2001, the Company was able to terminate
its operating leases and management contracts with subsidiaries of Hilton, and establish the TRS Lessees, which currently lease 52 of our hotels. This TRS structure enables us to directly oversee the
management of these hotels without an intermediate third-party lessee. The new TRS structure also allows the Company to retain the operating profits or losses from the hotels in the TRS lessee
structure and provides the Company with the following advantages when compared to the Company's prior third-party lessee structure:



Experienced Senior Management.The senior management team is comprised of three executive officers with complementary skills
and extensive experience in the hotel industry and various other areas of real estate. Robert M. Solmson, the Company's Chairman of the Board and Chief Executive Officer, founded the Company in 1993
and has been actively involved in the real estate and hotel businesses since 1974. Randy L. Churchey, the Company's President and Chief Operating Officer since November 1999, previously served
as the Chief Financial Officer for FelCor Lodging Trust Incorporated and prior to that held various positions with Coopers & Lybrand, L.L.P. Kevin M. Luebbers, the Company's Executive Vice
President and Chief Financial Officer, joined RFS in July 2000 from Hilton Hotels Corporation, where he most recently served as Senior Vice President of Planning and Investment Analysis.

Business Strategy

The principal features of the Company's business strategy are outlined below:

Actively Manage the Portfolio of Assets.The Company seeks to increase operating cash flows through aggressive asset
management. The Company applies its asset management and investing expertise to the renovation, redevelopment and rebranding of its existing hotels and the maintenance of strong strategic
relationships with its brand owners and managers. Over the past five fiscal years, the Company has spent approximately $101 million upgrading, renovating and redeveloping existing hotels in
order to enhance their competitive position and improve cash flow. Recent examples of this strategy include:



Maintain Strong Brand Affiliations.All but two of the Company's hotels operate under franchises from national hotel brands.
Franchised hotels typically have higher levels of occupancy and average daily rates than non-franchised hotels due to access to the national reservation systems and marketing

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provided by these franchisors. For the year ended December 31, 2002, the Company generated 95% of its EBITDA from hotels under franchise by four of the largest and most
well-respected hotel franchisors: Marriott (Residence Inn, Courtyard by Marriott, TownePlace Suites by Marriott), Hilton (Hilton, Doubletree, Hampton Inn, Homewood Suites by Hilton),
Starwood (Sheraton and Four Points by Sheraton) and Six Continents (Holiday Inn and Holiday Inn Express).

Make Selective Acquisitions.Over the past several years, the Company believed that acquisition prices were not attractive by
historical standards and generally offered cash returns below the Company's cost
of capital; as a result, the Company reduced its acquisition activity. The Company believes that the current acquisition environment may become more favorable because an increasing number of owners
are seeking liquidity events and many potential buyers are focused on integrating past acquisitions and reducing debt levels. The Company intends to focus its acquisition strategy primarily on hotels
consistent with its current hotel portfolio, diversified by brand, geography and market segment.

Divest Non-Core Properties.The Company continues to modify its portfolio by selectively divesting hotels that
are not consistent with its long-term investment objectives, particularly limited service hotels located in smaller markets. The Company intends to continue to selectively divest hotels
that:



Over
the past five years, the Company has sold 11 non-core properties for approximately $65.1 million.

Financing

The Company believes there is a competitive advantage in limiting the use of leverage and preserving a conservative capital structure. The Company is committed to
maintaining financial flexibility, which the Company believes may allow it to pursue selective acquisitions and attractive renovation, rebranding and redevelopment opportunities. As part of this
commitment, the Company's board of directors presently has a policy limiting the amount of total debt the Company will incur to an amount not in excess of 45% of its investment in hotel properties, at
cost, as defined. Furthermore, management's long-term compensation is based, in part, on maintaining leverage below this target ratio. At December 31, 2002, the company's ratio of
total debt to investment in hotel properties, at cost, as defined, was 37%. Additionally, the Company's ratios of debt to EBITDA and EBITDA to interest expense for the year ended December 31,
2001 were 4.4x and 2.6x, respectively.

The
interest rate on the $140 million Line of Credit ranges from 150 basis points to 250 basis points above LIBOR, depending on the Company's ratio of total debt to its investment
in hotel properties (as defined in the Line of Credit agreement). The average interest rate on outstanding contracts under the Line of Credit was approximately 3.9% at December 31, 2002,
including the current LIBOR spread of 250 basis points. The Line of Credit is collateralized by first priority mortgages on 24 hotels that restrict the transfer, pledge or other hypothecation of the
hotels (collectively, the "Collateral Pool"). The Company can obtain a release of the pledge of any hotel in the Collateral Pool if the Company
provides a substitute hotel or reduces the total availability under the Line of Credit. The Line of Credit contains various covenants including the maintenance of a minimum net worth, minimum debt and
interest coverage ratios, and total indebtedness and liability limitations. The Company was in compliance with these covenants at December 31, 2002 (see "Management's Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and Capital Resources").

6

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On
February 26, 2002, the Partnership sold $125 million of senior notes. The senior notes mature March 1, 2012 and bear interest at a rate of 9.75% per year, payable
semi-annually, in arrears, on March 1 and September 1 of each year, commencing on September 1, 2002. The senior notes are unsecured obligations of the Partnership and
are guaranteed by RFS and certain of its subsidiaries. The senior notes contain covenants that could, among other things, restrict RFS's ability to borrow money, pay dividends on or repurchase capital
stock, make investments, and sell assets or enter into mergers and consolidations. The Partnership was in compliance with these covenants at December 31, 2002. Net proceeds from the issuance of
the senior notes of $121.5 million were used to retire the 1996 CMBS mortgage debt on March 20, 2002 ($57.5 million outstanding), pay the prepayment penalty on the 1996 CMBS
mortgage debt of approximately $5.5 million, terminate the two outstanding interest rate swap agreements for approximately $3.2 million, with the balance used to reduce outstanding
borrowings under the line of credit. As a result of the prepayment of the 1996 CMBS debt, the Partnership expensed $1.4 million in unamortized debt costs. See Notes 4 and 12 to the Consolidated
Financial Statements for additional detail regarding the senior notes and the guarantors thereof.

The
Company's other borrowings are nonrecourse to the Company and contain provisions allowing for the substitution of collateral, upon satisfaction of certain conditions. Most of the
mortgage borrowings are prepayable and subject to various prepayment penalties, yield maintenance, or defeasance obligations. At December 31, 2002 and 2001, approximately 98% and 96% of RFS'
debt is fixed at an average interest rate of 8.7% and 7.7%, respectively.

The
Company believes that it maintains a conservative dividend policy. Based on 2002 results, the Company's dividend payout ratio was approximately 75% (dividends paid to common
shareholders divided by funds from operations) and the dividend coverage ratio was 1.3x (funds from operations divided by dividends paid to common shareholders).

Competition

Substantially all of the Hotels are located in developed areas that include other hotel properties. The number of competitive hotel properties in a particular
area could have a material adverse effect on occupancy, average daily rate and revenue per available room of the Hotels. New, competing hotels may be opened in the Company's markets, which could
materially and adversely affect hotel operations.

Employees

At December 31, 2002, the Company had a total of 23 employees. Robert M. Solmson, (age 55), Chairman of the Board and Chief Executive Officer, Randy L.
Churchey, (age 42), President and Chief Operating Officer, Kevin M. Luebbers, (age 36), Executive Vice President and Chief Financial Officer, and Craig T. Hofer (age 43), Vice President and Chief
Information Officer each have employment agreements with the Company. Information with respect to these employment agreements is incorporated by reference to the RFS Proxy Statement.

All
persons employed in the day-to-day operations of the hotels are employees of the management companies engaged to operate the hotels and are not the Company's
employees. Should there be an employee disruption at any of the third party management companies, i.e. a strike, this could have a significant impact on the Company's operations.

Tax Status

The Company has operated and intends to continue to operate so as to qualify as a REIT under the federal income tax laws. Qualification as a REIT involves the
application of highly technical and complex rules for which there are only limited judicial or administrative interpretations. There are no controlling authorities that deal specifically with many tax
issues affecting a REIT that owns hotel properties. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT.

7

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New
regulations, administrative interpretations or court decisions could adversely affect the Company's qualification as a REIT or the federal income tax consequences of such
qualification. If RFS were to fail to qualify as a REIT in any taxable year, it would not be allowed a deduction for distributions to shareholders in computing our taxable income. It also would be
subject to federal income tax (including any applicable alternative minimum tax) on taxable income at regular corporate rates. Unless entitled to relief under certain Code provisions, RFS also would
be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. As a result, the cash available for distribution to shareholders would be
reduced for each of the years involved. Although RFS currently intends to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Board of Directors, with the consent of a majority of the shareholders, to revoke the REIT election.

Under
the RMA, commencing January 1, 2001, the Company may now own up to 100% of the stock of one or more taxable REIT subsidiaries ("TRS"). A TRS is a taxable corporation that
may lease hotels
under certain circumstances, provide services to the Company, and perform activities unrelated to the Company's tenants, such as third-party management, development, and other independent business
activities. Overall, no more than 20% of the value of the Company's assets may consist of securities of one or more TRSs.

Under
the RMA, a TRS is permitted to lease hotels from the Company as long as the hotels are operated on behalf of the TRS by a third-party hotel manager who satisfies the following
requirements:



The
RMA limits the deductibility of interest paid or accrued by a TRS to RFS to assure that the TRS is subject to an appropriate level of corporate taxation. The RMA also imposes a 100%
excise tax on transactions between a TRS and the Company or its tenants that are not conducted on an arm's-length basis.

Cautionary Factors That May Affect Future Results

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements containing the words "believes", "anticipates", "expects" and words of similar import. Such forward-looking statements relate to future
events, the future financial performance of the Company, and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the
Company or industry results to be materially different from any future results, performance or achievements expressed under "BusinessRisk Factors" or implied by such forward looking
statements. Readers should specifically consider the various factors identified in this report and in any other documents filed by the Company with the Securities and Exchange Commission that could
cause actual results to differ. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.

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Risk Factors

Risks Related to the Company and the Conduct of Business

Current geo-political uncertainty as well as the weak economy have adversely impacted the hotel industry generally, and the Company has
experienced an adverse effect on its results of operations and financial condition. These trends may continue to impact the Company into the foreseeable future.

Prior to September 11, 2001, revenue per available room began to decline as a result of the slowing economy, particularly the Company's hotels in San
Francisco and Silicon Valley. The terrorist attacks of September 11, 2001, the current geo-political uncertainty related to potential conflicts with Iraq and North Korea, the
continued terrorist threats, and the effects of a weak economy have led to a substantial reduction in business and leisure travel throughout the United States and industry revenue per available room
generally. 2002 marked the second consecutive year in which revenue per available room has declined year over year. While revenue per available room has improved sequentially during each quarter of
2002 as compared to 2001 (down 16.6% in the first quarter, 10.6% in the second quarter, 4.1% in the third quarter and 1.6% in the fourth quarter), revenue per available room may continue to decline.
The Company cannot predict the extent to which the current geo-political uncertainty will continue to directly or indirectly impact the hotel industry or the Company's operating results in
the future. Continued lower revenue per available room at the Company's hotels could have an adverse effect on its results of operations and financial condition, including the Company's ability to
remain in compliance with debt covenants, fund capital improvements and renovations at its hotels and the ability to make dividend payments necessary to maintain the REIT tax status. Additional
terrorist attacks or war could have further material adverse effects on the hotel industry and the Company's operations.

TRS lessee structure subjects the Company to the risk of increased hotel operating expenses.

Prior to January 1, 2001, substantially all of the Company's hotels were leased to third-parties under leases providing for the payment of rent based, in
part, on revenues from the Company's hotels. Accordingly, operating risks were essentially limited to changes in hotel revenues and to the lessees' ability to pay the rent due under the leases. In
addition to the ownership expenses previously borne by the Company, the Company is now subject to the risks of increased hotel operating expenses for the 52 hotels now in the Company's TRS lessee
structure, including but not limited to:



Increases
in these operating expenses can have a significant adverse impact on the Company's earnings and cash flow.

Uninsured and underinsured losses might have an adverse effect on the Company's financial condition.

The Company maintains comprehensive insurance on each of its hotels, including liability, fire and extended coverage, of the type and amount the Company believes
is customarily obtained for or by hotel owners. All 10 of the Company's hotels in California are located in areas that are subject to earthquake activity. These hotels are located in areas of high
seismic risk and some were constructed under building codes which were less stringent with regard to earthquake related requirements. An earthquake could render significant uninsured damage to the
hotels. Additionally, areas in Florida,

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where seven of the company's hotels are located, may experience hurricane or high-wind activity. The Company has earthquake insurance policies on its hotels in California and wind
insurance policies on certain of its hotels located in Florida. However, various types of catastrophic losses, like earthquakes
and floods may not be fully insurable or may not be economically insurable. With respect to the hotels in California, in addition to the applicable deductibles under the earthquake insurance policies,
the Company is self-insured for the first $7.5 million per earthquake. The Company also maintains terrorism insurance, which the Company believes currently insures against losses
resulting from a terrorist attack. In the event of a substantial loss, insurance coverage may not be able to cover the full current market value or replacement cost of the Company's lost investment.
Inflation, changes in building codes and ordinances, environmental considerations and other factors might also affect the Company's ability to replace or renovate a hotel after it has been damaged or
destroyed.

Hotel concentration in certain states, particularly California, subjects the Company to operating risks.

For the year ended December 31, 2002, approximately 59% of the Company's EBITDA came from its hotels located in California (30%), Florida (10%), Texas
(9%), Michigan (5%) and Illinois (5%). Adverse events in these areas, such as economic recessions or natural disasters, could cause a loss of revenues from these hotels, which could have a greater
adverse effect on the Company as a result of its concentration of assets in these areas. The Company's geographic concentration also exposes it to risks of oversupply and competition in its principal
markets. Each of the Company's hotels competes with other hotels in its market area. A number of additional hotel rooms will continue to be built in the markets in which the Company's hotels are
located, which could result in too many hotel rooms in those regions. Significant increases in the supply of hotel rooms without corresponding increases in demand can have a severe adverse effect on
the Company's business, financial condition and results of operations.

The
San Francisco Bay Area, including Silicon Valley, has suffered an economic downturn related to the decline in the technology and Internet related markets. In particular, revenues at
the Company's four hotels in Silicon Valley and two hotels in San Francisco have been adversely impacted by the slowing economy and by recent job reductions in the technology and Internet sectors. As
a result of the continued weak economy and geo-political uncertainty, while the Company's entire hotel portfolio was adversely impacted, the northern California hotels were particularly
affected. Revenue per available room at the Company's five comparable hotels in northern California (excludes the Hotel Rex in San Francisco which is currently closed for earthquake retrofit and
renovation), consisting of one hotel in San Francisco and four hotels in Silicon Valley, experienced an average decline in revenue per available room of 22.3% for the year. Excluding the five
comparable northern California hotels, revenue per available room declined 5.1% for the year. For the year ended December 31, 2002, the Company received approximately 30% of its EBITDA from
hotels in portions of California, including Silicon Valley (13%), Los Angeles (8%), Sacramento (3%), San Diego (3%) and San Francisco (3%).

Also,
California faced an energy crisis during 2001 that significantly increased energy costs at the 10 California hotels, although the impact was somewhat offset through the Company's
ability to collect energy surcharges in California. While this energy crisis was resolved, if California experiences another energy crisis, and the Company cannot adequately pass its increased costs
to customers through energy surcharges or otherwise, or the state's economy, particularly Northern California, continues to experience decreasing occupancy rates, revenue per available room, average
daily rate ("ADR") or other industry fundamentals, it could have a material adverse effect on the Company's business, financial condition and results of operation.

10

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Reliance on third-party management companies to operate the Company's hotels and a change in these management companies may be costly and disruptive to
the Company's operations.

Under the REIT Modernization Act, in order for us to continue to qualify as a REIT, the Company's hotels must be managed by third-parties. Under the terms of the
management agreements, the Company's ability to participate in operating decisions regarding the hotels is limited. Flagstone and four other unrelated third-parties currently manage all of the
Company's hotels. These property managers presently control the daily operations of the hotels. The Company depends on these managers to adequately operate its hotels as provided in the management
agreements. Even if the company believes that its hotels are not being managed efficiently or in a manner that results in satisfactory occupancy rates, revenue per available room or ADR, the Company
may not be able to force the management company to change the way it operates the Company's hotels in a timely manner. Additionally, in the event that the Company needs to replace any of its
management companies, particularly Flagstone, which manages 50 of the 57 hotels, the Company may experience significant disruptions at its hotels and in its operations and decreased occupancy.
Furthermore, because the Company must have third-party managers to maintain its REIT status, it may be forced to enter into new management agreements on terms that the Company believes are unfavorable
or less favorable than the terms of the Company's current agreements. Any of the foregoing, may result in a material adverse effect on the Company's business, financial condition and results of
operations.

Compliance with requirements of franchise agreements.

Most of the Company's hotels are operated under a franchise license. Each license agreement requires that the licensed hotel be maintained and operated in
accordance with certain standards and requires the Company to pay a variety of franchise related fees to the franchisors. The franchisors also may require substantial improvements to the Company's
hotels, for which the Company would be responsible, as a condition to the renewal or continuation of these franchise licenses.

If
a franchise license terminates due to the Company's failure to make required improvements or to otherwise comply with its terms, the Company may be liable to the franchisor for a
termination payment. These termination payments would vary by franchise agreement and by hotel. Although the Company has never had a franchise agreement terminated by a franchisor, the loss of a
substantial number of franchise licenses and the related termination payments could have a material adverse effect on its business, financial condition and results of operations.

The Company may not be able to successfully implement its selective acquisition and disposition strategy or fully realize the benefit of its strategy.

One of the Company's key strategies includes the acquisition of attractive hotel properties. However, the Company competes for hotel acquisitions with entities
that have substantially greater financial and other resources and a lower cost of capital than the Company. These entities generally may be able to accept more risk than the Company can manage wisely
and may be able to pay higher acquisition prices than the Company is willing to pay. This competition may generally limit the number of suitable investment opportunities offered to the Company. This
competition may also increase the bargaining power of property owners seeking to sell to the Company, making it more difficult for the Company to acquire new properties on attractive terms.
Furthermore, in recent years, the Company believes that acquisition prices were not attractive by historical standards and the Company reduced its acquisition activity accordingly. While the Company
believes that the hotel acquisition market has recently become more favorable, there can be no assurance that a sufficient number of attractive properties, both in terms of price and quality, will be
available for acquisition or that the Company will ultimately be able to acquire those hotel properties on favorable terms.

Additionally,
the Company's strategy includes continually shifting its portfolio by selectively divesting limited service hotels which are not consistent with the Company's
long-term investment

11

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horizon, particularly those in smaller markets. As with acquisitions, the Company faces competition for buyers of its hotel properties. Other sellers of hotels may have the financial resources to
dispose of their hotels on unfavorable terms that the Company would be unable to accept. If the Company cannot find buyers for its non-core properties, it will not be able to implement its
divestiture strategy.

In
the event that the Company cannot fully execute its acquisition and divestiture strategy or realize the benefits therefrom, it may not be able to grow its business, EBITDA or cash
flow.

The Company may be unable to adequately finance or fully realize the anticipated benefits of its renovations.

As part of the Company's internal growth strategy, it regularly renovates, redevelops and, in certain cases, re-brands its hotels. In addition, the
franchisors require the Company to make periodic capital improvements as a condition to keeping the franchise licenses. During 2000, 2001 and 2002, the Company spent approximately
$32.6 million, $18.0 million and $14.6 million, respectively, on capital improvements to its hotels. The Company expects to spend approximately $11.7 million on capital
improvements to its hotels in 2003. The Company's current indebtedness, as well as its senior notes, will restrict its ability to finance proposed capital expenditures, which may cause the Company to
delay, alter materially or abandon planned capital improvements and renovations. In addition to the difficulties with financing these projects discussed above, renovations also give rise to the
following risks:



If
the completion of renovation projects is significantly delayed, operating results could be adversely affected. In addition, no assurance can be given that recently completed and
ongoing improvements will achieve the results anticipated when the Company made the decision to invest in the improvements.

Risks Related to the Hotel Industry

The Company is subject to the risks of hotel operations.

The Company has invested only in hotel-related assets, and its hotels are subject to all of the risks common to the hotel industry. These risks could adversely
affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses, and generally include:



12

---



A continued industry fundamental downturn could adversely affect results of operations.

According to Smith Travel Research, for all U.S. hotels, industry revenue per available room experienced year over year decreases of approximately 2.0% and 6.9%
in 2002 and 2001, respectively, and is expected to increase slightly in 2003.

If
the Company is unable to sustain appropriate levels of revenue per available room, its operating margins may deteriorate, and it may be unable to execute its business plan, including
the selective acquisition of hotel properties. In addition, if this downward trend continues, the Company may be unable to continue to meet its debt service obligations as they become due or to obtain
necessary additional financing.

Seasonality of the hotel business can be expected to cause quarterly fluctuations in revenues.

The hotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth
quarters. This seasonality can be expected to cause quarterly fluctuations in revenues. Quarterly financial results also may be adversely affected by factors outside the Company's control, including
weather conditions and poor economic factors. As a result, the Company may have to enter into short-term borrowing in the first and fourth quarters in order to offset these fluctuations in
revenues and to make distributions to its shareholders.

The Company will also encounter risks that may adversely affect real estate ownership in general.

The Company's investments in hotels are subject to the numerous risks generally associated with owning real estate, including among others:



Moreover,
real estate investments are relatively illiquid, and the Company may not be able to vary its portfolio in response to changes in economic and other conditions.

Compliance with environmental laws may adversely affect the Company's financial condition.

The Company's hotel properties are subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the
authority to require the owner of a contaminated property to clean up the property, even if the owner did not know of or was not responsible for the contamination. These laws also apply to persons who
owned a property at the time it became contaminated. In addition to the costs of cleanup, contamination can affect the value of a property and, therefore, an owner's ability to borrow funds using the
property as collateral. Under the environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, like a landfill or an
incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment. Furthermore, decisions by courts have established that
third-parties may recover damages for injury caused by

13

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property contamination. For instance, a person exposed to asbestos while staying in a hotel may seek to recover damages if he suffers injury from the asbestos.

The
Company could be responsible for the costs discussed above, if one or more of its properties are found to be contaminated. The costs to clean up a contaminated property, to defend
against a claim, or to comply with environmental laws could be material and could affect the funds available for distribution to our shareholders. To determine whether any costs of this nature may be
incurred, the Company commissioned Phase I environmental site assessments, or ESAs, before it acquired hotels. These studies typically include a review of historical information and a site visit but
not soil or groundwater testing. The Company obtained the ESAs to help identify whether it might be responsible for cleanup costs or other environmental liabilities. The ESAs on the Company's hotels
did not reveal any environmental conditions that are likely to have a material adverse effect on the Company's business, assets, results of operations or liquidity. However, ESAs do not always
identify all potential problems or environmental liabilities. Consequently, the Company may have material environmental liabilities of which it is unaware.

The
Phase I ESA for the Hampton InnAirport in Indianapolis, indicated that the hotel disposes of approximately 10% of its solid waste at a facility that is a state Superfund
site. Such a site may be subject to investigation and remediation under the federal and state Superfund laws, and persons that sent hazardous substances to the site may be jointly and severally liable
for the costs of the work. The Phase I ESA report states that solid waste from the Indianapolis hotel was disposed into a domestic waste cell of the facility. A state official informed the engineering
firm conducting the Phase I ESA that this domestic waste cell is segregated by a containment structure and is adjacent to, but not part of, the Superfund site. The Phase I audit did not indicate that
the Indianapolis hotel has arranged for the disposal of any hazardous substances at this facility. If the Indianapolis hotel in fact arranged for such disposal, however, it could be found liable for
at least a part of any response costs.

Compliance with the Americans with Disabilities Act may adversely affect our financial condition.

Under the Americans with Disabilities Act of 1990, all public accommodations, including hotels, are required to meet certain federal requirements for access and
use by disabled persons. The Company believes that its hotels substantially comply with the requirement of the Americans with Disabilities Act. However, a determination that the hotels are not in
compliance with that Act could result in liability for both governmental fines and damages to private parties. If the Company were required to make unanticipated major modifications to the hotels to
comply with the requirements of the Americans with Disabilities Act, it could adversely affect the Company's ability to pay its obligations.

Risks Related to RFS's Qualification as a REIT Under U.S. Tax Laws

The federal income tax laws governing REITs are complex.

RFS has operated and intends to continue to operate in a manner that is intended to qualify it as a REIT under the federal income tax laws. The REIT qualification
requirements are extremely complicated and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, RFS cannot be certain that it has been or will
continue to be successful in operating so as to qualify as a REIT. At any time, new laws, interpretations, or court decisions may change the federal tax laws or the federal income tax consequences of
qualification as a REIT.

Failure to make required distributions would subject RFS to tax.

In order to qualify as a REIT, each year RFS must pay out to its shareholders at least 90% of its taxable income, other than any net capital gain. To the extent
that RFS satisfies the distribution requirement, but distributes less than 100% of its taxable income, RFS will be subject to federal

14

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corporate income tax on its undistributed taxable income. In addition, RFS will be subject to a 4% nondeductible excise tax if the actual amount that it pays out to its shareholders in a calendar
year is less than a minimum amount specified under federal tax laws. RFS's only source of funds to make such distributions comes from distributions that it receives from the Operating Partnership.
Accordingly, RFS may be required to borrow money or sell assets to make distributions sufficient to enable it to pay out enough of its taxable income to satisfy the distribution requirement and to
avoid corporate income tax and the 4% excise tax in a particular year. This risk may be intensified because the Company's current indebtedness restricts its ability to borrow money and sell assets,
even if necessary to make distributions to maintain RFS's REIT status.

Failure to qualify as a REIT would subject RFS to federal income tax.

If RFS fails to qualify as a REIT in any taxable year, RFS would be subject to federal income tax on its taxable income. RFS might need to borrow money or sell
hotels in order to pay any such tax. If RFS ceases to be a REIT, RFS no longer would be required to distribute most of its taxable income to its shareholders. Unless RFS's failure to qualify as a REIT
were excused under federal income tax laws, it could not re-elect REIT status until the fifth calendar year following the year in which it failed to qualify.

The formation of the TRS Lessees will increase the Company's overall tax liability.

Effective January 1, 2001, the Company formed the TRS Lessees, which currently lease 52 of our hotels. The TRS Lessees are subject to federal and state
income tax on their taxable income, which consists of the revenues from the hotels leased by the TRS Lessees net of the operating expenses for such hotels and rent payments. Accordingly, although the
formation of the TRS Lessees allows the Company to participate in the operating income from the hotels in addition to receiving rent, that operating income is fully subject to income tax. The
after-tax net income of the TRS Lessees is available for distribution to the shareholders as dividends.

Ownership Limitation

In order for RFS to maintain its status as a REIT, no more than 50% in value of its outstanding stock may be owned (actually or constructively under the
applicable tax rules) by five or fewer persons during the last half of any taxable year. The RFS Charter prohibits, subject to certain exceptions, any person from owning more than 9.9% (determined in
accordance with the Internal Revenue Code and the Securities Exchange Act of 1934, as amended) of the number of outstanding shares of any class of its capital stock. The RFS Charter also prohibits any
transfer of its capital stock that would result in a violation of the 9.9% ownership limit, reduce the number of stockholders below 100 or otherwise result in RFS failing to qualify as a REIT. Any
attempted transfer in violation of the Charter prohibitions will be void and the intended transferee will not acquire any right in the shares resulting in such violation. RFS has the right to take any
lawful action that it believes necessary or advisable to ensure compliance with these ownership and transfer restrictions and to preserve its status as a REIT, including refusing to recognize any
transfer of capital stock in violation of its Charter.

If
a person holds or attempts to acquire shares in excess of RFS' ownership and transfer restrictions, these shares will be immediately designated as
"shares-in-trust" and transferred automatically and by operation of law, in trust, to a trustee designated by RFS. The trustee will have the right to receive all distributions
on, to vote and to sell these shares. The holder of the excess shares will have no right or interest in these shares, except the right (under certain circumstances) to receive the lesser of:
(i) the proceeds of any sale of these shares by the trustee to a permitted owner and (ii) the amount paid for
these shares (or the market value of these shares, determined in accordance with the Charter, if the shares were received by gift, bequest or otherwise without payment). Accordingly, the record owner
of any shares designated as shares-in-trust would suffer a financial loss if the price at which these shares are sold to a permitted owner is less than the price paid for these
shares.

15

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Available Information

The Company's internet website is www.rfshotel.com. The Company makes available free of charge through its website its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. The
information on the Company's website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings that we make with the SEC.

Item 2.Properties

The following sets forth information regarding the Company's hotels as of, and for the year ended December 31, 2002. Those properties that are encumbered
by the Line of Credit or other mortgages are identified in Schedule III, which is filed herewith. Pursuant to management agreements between the TRS Lessees and Flagstone, Flagstone manages 50
of the Company's 57 hotels. As indicated below, the remaining seven hotels are leased to or managed by other hotel management companies.

|                        |                               |                            |      |     |     | Year Ended
December 31, 2002 |       |      
|----------------------- | ----------------------------- | -------------------------- | ---- | --- | --- | ---------------------------- | ----- | -----
|
|
|Full Service            |                               |                            |      |     |     |                              |       |      
|Beverly Heritage        |                               |                            |      |     |     |                              |       |      
|Milpitas, California    |                               | 1988                       |      | 237 |     | $                            | 4,437 |      
|Doubletree              |                               |                            |      |     |     |                              |       |      
|San Diego, California   |                               | 1990                       |      | 221 |     |                              | 5,805 |      
|Hilton                  |                               |                            |      |     |     |                              |       |      
|                        | San Francisco, California     |                            | 1976 |     | 234 |                              |       | 8,130
|Holiday Inn             |                               |                            |      |     |     |                              |       |      
|                        | Crystal Lake, Illinois        |                            | 1988 |     | 197 |                              |       | 4,370
|                        | Louisville, Kentucky          |                            | 1970 |     | 169 |                              |       | 2,778
|                        | Lafayette, Louisiana          |                            | 1983 |     | 242 |                              |       | 4,027
|                        | Flint, Michigan               |                            | 1990 |     | 171 |                              |       | 3,747
|                        | Columbia, South Carolina      |                            | 1969 |     | 175 |                              |       | 2,998
|Hotel Rex               |                               |                            |      |     |     |                              |       |      
|                        | San Francisco, California (1) |                            | 1912 |     | 94  |                              |       | 2,418
|Four Points by Sheraton |                               |                            |      |     |     |                              |       |      
|                        | Bakersfield, California       |                            | 1983 |     | 198 |                              |       | 3,836
|                        | Pleasanton, California        |                            | 1985 |     | 214 |                              |       | 5,288
|Sheraton                |                               |                            |      |     |     |                              |       |      
|                        | Birmingham, Alabama           |                            | 1984 |     | 205 |                              |       | 3,792
|                        | Milpitas, California          |                            | 1988 |     | 229 |                              |       | 6,678
|                        | Sunnyvale, California         |                            | 1980 |     | 173 |                              |       | 5,471
|                        | Clayton, Missouri             |                            | 1965 |     | 257 |                              |       | 6,385
|                        |                               |                            |      |     |     |                              |       |      
|                        |                               | Full Service Total/Average |      |     |     | 3,016                        |       | $    
|                        |                               |                            |      |     |     |                              |       |      

16

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|Extended Stay                 |                               |  |      |  |       |  |   |        |  |  
|----------------------------- | ----------------------------- |  | ---- |  | ----- |  | - | ------ |  | -
|Homewood Suites by Hilton     |                               |  |      |  |       |  |   |        |  |  
|                              | Chandler, Arizona             |  | 1998 |  | 83    |  | $ | 1,847  |  | $
|Residence Inn by Marriott     |                               |  |      |  |       |  |   |        |  |  
|                              | Sacramento, California        |  | 1987 |  | 176   |  |   | 5,135  |  |  
|                              | Torrance, California          |  | 1984 |  | 247   |  |   | 7,732  |  |  
|                              | Wilmington, Delaware          |  | 1989 |  | 120   |  |   | 3,629  |  |  
|                              | Jacksonville, Florida (2)     |  | 1997 |  | 120   |  |   | 2,934  |  |  
|                              | Orlando, Florida              |  | 1984 |  | 176   |  |   | 4,324  |  |  
|                              | West Palm Beach, Florida (2)  |  | 1998 |  | 78    |  |   | 2,126  |  |  
|                              | Atlanta, Georgia              |  | 1987 |  | 128   |  |   | 2,759  |  |  
|                              | Ann Arbor, Michigan           |  | 1985 |  | 114   |  |   | 3,251  |  |  
|                              | Kansas City, Missouri         |  | 1987 |  | 96    |  |   | 2,297  |  |  
|                              | Charlotte, North Carolina (1) |  | 1984 |  | 116   |  |   | 1,986  |  |  
|                              | Fishkill, New York            |  | 1988 |  | 137   |  |   | 5,817  |  |  
|                              | Warwick, Rhode Island         |  | 1989 |  | 96    |  |   | 3,563  |  |  
|                              | Ft. Worth, Texas              |  | 1983 |  | 120   |  |   | 3,692  |  |  
|                              | Tyler, Texas                  |  | 1985 |  | 128   |  |   | 2,652  |  |  
|TownePlace Suites by Marriott |                               |  |      |  |       |  |   |        |  |  
|                              | Miami Lakes, Florida (2)      |  | 1999 |  | 95    |  |   | 1,621  |  |  
|                              | Miami West, Florida (2)       |  | 1999 |  | 95    |  |   | 1,500  |  |  
|                              | Fort Worth, Texas             |  | 1998 |  | 95    |  |   | 1,703  |  |  
|                              |                               |  |      |  |       |  |   |        | 
|                              | Extended Stay Total/Average   |  |      |  | 2,220 |  | $ | 58,568 |  | $
|                              |                               |  |      |  |       |  |   |        | 

17

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|Limited Service               |                             |                         |      |       |     |       |        |       |         |      
|----------------------------- | --------------------------- | ----------------------- | ---- | ----- | --- | ----- | ------ | ----- | ------- | -----
|Comfort Inn                   |                             |                         |      |       |     |       |        |       |         |      
|                              | Marietta, Georgia           |                         | 1989 |       | 184 |       | $      | 2,449 |         | $    
|Courtyard                     |                             |                         |      |       |     |       |        |       |         |      
|                              | Flint, Michigan             |                         | 1996 |       | 102 |       |        | 2,081 |         |      
|Hampton Inn                   |                             |                         |      |       |     |       |        |       |         |      
|                              | Chandler, Arizona           |                         | 1997 |       | 101 |       |        | 1,621 |         |      
|                              | Sedona, Arizona             |                         | 1997 |       | 56  |       |        | 1,319 |         |      
|                              | Denver, Colorado            |                         | 1985 |       | 138 |       |        | 1,557 |         |      
|                              | Lakewood, Colorado          |                         | 1987 |       | 150 |       |        | 1,929 |         |      
|                              | Ft. Lauderdale, Florida     |                         | 1986 |       | 122 |       |        | 2,129 |         |      
|                              | Jacksonville, Florida (2)   |                         | 1998 |       | 118 |       |        | 2,542 |         |      
|                              | Indianapolis, Indiana       |                         | 1994 |       | 131 |       |        | 2,805 |         |      
|                              | Bloomington, Minnesota      |                         | 1994 |       | 135 |       |        | 2,774 |         |      
|                              | Minnetonka, Minnesota       |                         | 1990 |       | 127 |       |        | 1,921 |         |      
|                              | Hattiesburg, Mississippi    |                         | 1988 |       | 154 |       |        | 2,354 |         |      
|                              | Lincoln, Nebraska           |                         | 1983 |       | 111 |       |        | 1,827 |         |      
|                              | Omaha, Nebraska             |                         | 1985 |       | 129 |       |        | 2,114 |         |      
|                              | Oklahoma City, Oklahoma     |                         | 1986 |       | 134 |       |        | 2,379 |         |      
|                              | Tulsa, Oklahoma             |                         | 1986 |       | 148 |       |        | 1,871 |         |      
|                              | Memphis, Tennessee          |                         | 1992 |       | 120 |       |        | 1,958 |         |      
|                              | Laredo, Texas               |                         | 1995 |       | 119 |       |        | 2,995 |         |      
|                              | Houston, Texas              |                         | 1996 |       | 119 |       |        | 2,099 |         |      
|Holiday Inn Express           |                             |                         |      |       |     |       |        |       |         |      
|                              | Arlington Heights, Illinois |                         | 1989 |       | 125 |       |        | 1,960 |         |      
|                              | Downers Grove, Illinois     |                         | 1984 |       | 123 |       |        | 1,811 |         |      
|                              | Bloomington, Minnesota      |                         | 1987 |       | 142 |       |        | 2,851 |         |      
|                              | Austin, Texas               |                         | 1992 |       | 125 |       |        | 1,730 |         |      
|                              | Wauwatosa, Wisconsin        |                         | 1984 |       | 122 |       |        | 2,276 |         |      
|                              |                             |                         |      |       |     |       |        |       |        
|Limited Service Total/Average |                             |                         |      | 3,035 |     |       | 51,352 |       |         | 46.34
|                              |                             |                         |      |       |     |       |        |       |        
|                              |                             | Portfolio Total/Average |      |       |     | 8,271 |        | $     | 180,080 |      
|                              |                             |                         |      |       |     |       |        |       |        

---

Item 3.Legal Proceedings

There is no litigation pending or known to be threatened against the Company or affecting any of its hotels other than claims arising in the ordinary course of
business or which are not considered to be material. Furthermore, most of such claims are substantially covered by insurance. The Company does not believe that any claims known to it, individually or
in the aggregate, will have a material adverse effect on it, without regard to any potential recoveries from insurers or other third parties.

Item 4.Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the RFS shareholders between October 1, 2002 and December 31, 2002.

18

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PART II

Item 5.Market for Registrant's Common Equity and Related Shareholder Matters

(a)
Market Information

RFS'
Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "RFS". The Series B Preferred shares and the Operating Partnership units are not publicly
traded, and accordingly, there is no established public trading market for such securities. The following table sets forth for the indicated periods the high and low sale prices for the Common Stock,
as traded on such exchange and the payment of distributions by the Company on its common shares or units and Series B Preferred shares or units for the years ended December 31, 2002 and
2001:

Distribution Paid per Series B Preferred Share or UnitStock Price

Distribution Paid per Common Share or UnitHigh

Low2002First Quarter

$
14.85

$
11.37

$
0.25

$
3.125Second Quarter


15.35


12.18


0.25


3.125Third Quarter


13.56


10.09


0.25Fourth Quarter


12.50


10.00


0.252001First Quarter

$
14.94

$
12.81

$
0.385

$
3.125Second Quarter


15.80


13.82


0.385


3.125Third Quarter


15.79


8.50


0.385


3.125Fourth Quarter


11.75


9.00


0.100


3.125


(b)
Holders

The
number of holders of record of shares of Common Stock was approximately 9,500 as of March 17, 2003. The number of shares outstanding was 28,516,733 as of March 17,
2003. The number of holders of units of the Operating Partnership was approximately 9,500 as of March 17, 2003. The number of units outstanding was 30,938,585 as of March 17, 2003. RFS
owns approximately 92% of the Operating Partnership units.

(c)
Distributions

The
Company has adopted a policy of paying regular quarterly distributions on its Common Stock and Operating Partnership units, and cash distributions have been paid on the Company's
Common Stock
and Operating Partnership units each quarter since its inception. On March 3, 2003, the Company's Board of Directors declared a first quarter distribution of $0.25 per common share or unit,
payable on March 31, 2003, to holders of record on March 17, 2003.

Earnings
and profits, which will determine the taxability of distributions to shareholders, will differ from net income reported for financial reporting purposes primarily due to the
differences for federal tax purposes in the estimated lives used to compute depreciation. The distributions paid per preferred share for the years ended December 31, 2002, 2001 and 2000 were
considered 100% ordinary income.

19

---

The following table characterizes distributions paid per common share of RFS for the years ended December 31, 2002, 2001 and 2000:

2002

2001

2000$

%

$

%

$

%Ordinary income

$
0.13

13.3
%
$
0.90

71.6
%
$
1.43

92.8
%Return of capital


0.87

86.7
%

0.36

28.4
%

0.02

1.3
%Capital gains












0.01

0.3
%Unrecaptured Section 1250 gain












0.08

5.6
%$
1.00

100
%
$
1.26

100
%
$
1.54

100
%


Item 6.Selected Financial Data

The following tables set forth selected historical financial data for RFS Hotel Investors, Inc. and RFS Partnership, L.P. that has been derived from the
financial statements of RFS and the Operating Partnership and the notes thereto. Such data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and all of the financial statements and notes thereto.

SELECTED FINANCIAL DATA  (in thousands, except per share and ratio amounts)

|                                                                                            |  | 2002 |         | 2001 |   | 2000    |   | 1999 |         | 1998 |  
|------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | -
|RFS HOTEL INVESTORS, INC.                                                                   |  |      |         |      |   |         |   |      |         |      |  
|Operating Data (1):                                                                         |  |      |         |      |   |         |   |      |         |      |  
|Total revenue                                                                               |  | $    | 198,898 |      | $ | 220,238 |   | $    | 106,786 |      | $
|Net income (loss)                                                                           |  |      | (3,788  | )    |   | (13,729 | ) |      | 30,790  |      |  
|Net income (loss) applicable to common shareholders                                         |  |      | (7,240  | )    |   | (11,713 | ) |      | 29,378  |      |  
|Diluted earnings (loss) per share                                                           |  |      | (0.26   | )    |   | (0.47   | ) |      | 1.20    |      |  
|Balance Sheet Data:                                                                         |  |      |         |      |   |         |   |      |         |      |  
|Investment in hotel properties, net                                                         |  |      | 593,289 |      |   | 615,562 |   |      | 635,997 |      |  
|Total assets                                                                                |  |      | 642,655 |      |   | 668,862 |   |      | 673,467 |      |  
|Total debt                                                                                  |  |      | 291,229 |      |   | 301,135 |   |      | 277,431 |      |  
|Shareholders' equity                                                                        |  |      | 301,219 |      |   | 290,811 |   |      | 348,454 |      |  
|Cash Flows Data:                                                                            |  |      |         |      |   |         |   |      |         |      |  
|Cash provided by operating activities                                                       |  |      | 36,526  |      |   | 10,466  |   |      | 65,223  |      |  
|Cash used by investing activities                                                           |  |      | (8,139  | )    |   | (8,642  | ) |      | (10,843 | )    |  
|Cash provided (used) by financing activities                                                |  |      | (32,184 | )    |   | 230     |   |      | (56,612 | )    |  
|Other Data:                                                                                 |  |      |         |      |   |         |   |      |         |      |  
|Recurring funds from operations(2)                                                          |  |      | 36,002  |      |   | 51,229  |   |      | 64,170  |      |  
|Weighted average common shares, partnership units and potential dilutive shares outstanding |  |      | 29,990  |      |   | 27,655  |   |      | 27,127  |      |  
|EBITDA(3)                                                                                   |  |      | 65,912  |      |   | 81,800  |   |      | 90,308  |      |  
|Ratio of earnings to fixed charges(4)                                                       |  |      | 0.8x    |      |   | 0.4x    |   |      | 2.4x    |      |  
|Supplemental ratio of earnings to fixed charges(5)                                          |  |      | 1.2x    |      |   | 2.0x    |   |      |         |      |  
|Ratio of EBITDA to interest expense                                                         |  |      | 2.6x    |      |   | 3.3x    |   |      | 3.9x    |      |  
|Ratio of Debt to EBITDA                                                                     |  |      | 4.4x    |      |   | 3.7x    |   |      | 3.1x    |      |  
|Dividends paid per share                                                                    |  |      | 1.00    |      |   | 1.255   |   |      | 1.54    |      |  

20

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|                                                                |  | 2002 |         | 2001 |   | 2000    |   | 1999 |         | 1998 |  
|--------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | -
|RFS PARTNERSHIP, L.P.                                           |  |      |         |      |   |         |   |      |         |      |  
|Operating Data (1):                                             |  |      |         |      |   |         |   |      |         |      |  
|Total revenue                                                   |  | $    | 198,898 |      | $ | 220,238 |   | $    | 106,786 |      | $
|Net income (loss)                                               |  |      | (4,432  | )    |   | (14,886 | ) |      | 34,008  |      |  
|Net income (loss) applicable to unitholders                     |  |      | (7,884  | )    |   | (12,870 | ) |      | 32,596  |      |  
|Diluted earnings (loss) per unit                                |  |      | (0.26   | )    |   | (0.47   | ) |      | 1.20    |      |  
|Balance Sheet Data:                                             |  |      |         |      |   |         |   |      |         |      |  
|Investment in hotel properties, net                             |  |      | 593,289 |      |   | 615,562 |   |      | 635,997 |      |  
|Total assets                                                    |  |      | 642,655 |      |   | 668,862 |   |      | 673,467 |      |  
|Total debt                                                      |  |      | 291,229 |      |   | 301,135 |   |      | 277,431 |      |  
|Redeemable limited partnership units, at redemption value       |  |      | 26,702  |      |   | 27,980  |   |      | 33,461  |      |  
|Partners' capital                                               |  |      | 300,522 |      |   | 291,715 |   |      | 349,667 |      |  
|Cash Flows Data:                                                |  |      |         |      |   |         |   |      |         |      |  
|Cash provided by operating activities                           |  |      | 36,526  |      |   | 10,466  |   |      | 65,223  |      |  
|Cash used by investing activities                               |  |      | (8,139  | )    |   | (8,642  | ) |      | (10,843 | )    |  
|Cash provided (used) by financing activities                    |  |      | (32,184 | )    |   | 230     |   |      | (56,612 | )    |  
|Other Data:                                                     |  |      |         |      |   |         |   |      |         |      |  
|Recurring funds from operations(2)                              |  |      | 36,002  |      |   | 51,229  |   |      | 64,170  |      |  
|Weighted average units and potential dilutive units outstanding |  |      | 29,990  |      |   | 27,655  |   |      | 27,127  |      |  
|EBITDA(3)                                                       |  |      | 65,912  |      |   | 81,800  |   |      | 90,308  |      |  
|Ratio of earnings to fixed charges(4)                           |  |      | 0.8x    |      |   | 0.4x    |   |      | 2.4x    |      |  
|Supplemental ratio of earnings to fixed charges(5)              |  |      | 1.2x    |      |   | 2.0x    |   |      |         |      |  
|Ratio of EBITDA to interest expense                             |  |      | 2.6x    |      |   | 3.3x    |   |      | 3.9x    |      |  
|Ratio of Debt to EBITDA                                         |  |      | 4.4x    |      |   | 3.7x    |   |      | 3.1x    |      |  
|Dividends paid per unit                                         |  |      | 1.00    |      |   | 1.255   |   |      | 1.54    |      |  

21

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QUARTERLY RESULTS OF OPERATIONS  (in thousands, except per share amounts)

|                          |                                                                                             | First Quarter |   | Second Quarter |   | Third Quarter |        | Fourth Quarter |   | Total  | 
|------------------------- | ------------------------------------------------------------------------------------------- | ------------- | - | -------------- | - | ------------- | ------ | -------------- | - | ------ | 
|RFS HOTEL INVESTORS, INC. |                                                                                             |               |   |                |   |               |        |                |   |        | 
|2002:                     |                                                                                             |               |   |                |   |               |        |                |   |        | 
|                          | Operating Data:                                                                             |               |   |                |   |               |        |                |   |        | 
|                          | Total revenue                                                                               |               | $ | 47,277         |   | $             | 53,628 |                | $ | 52,975 | 
|                          | Net income (loss)                                                                           |               |   | (7,548         | ) |               | 3,769  |                |   | 3,330  | 
|                          | Net income (loss) applicable to common shareholders                                         |               |   | (8,329         | ) |               | 1,098  |                |   | 3,330  | 
|                          | Diluted earnings (loss) per share                                                           |               |   | (0.32          | ) |               | 0.04   |                |   | 0.12   | 
|                          | Other Data:                                                                                 |               |   |                |   |               |        |                |   |        | 
|                          | Recurring funds from operations(2)                                                          |               |   | 7,849          |   |               | 11,350 |                |   | 10,449 | 
|                          | Weighted average common shares, partnership units and potential dilutive shares outstanding |               |   | 28,353         |   |               | 29,676 |                |   | 30,970 | 
|                          | Dividends paid per share                                                                    |               |   | 0.25           |   |               | 0.25   |                |   | 0.25   | 
|2001:                     |                                                                                             |               |   |                |   |               |        |                |   |        | 
|                          | Operating Data:                                                                             |               |   |                |   |               |        |                |   |        | 
|                          | Total revenue                                                                               |               | $ | 57,593         |   | $             | 59,864 |                | $ | 54,981 | 
|                          | Net income (loss)                                                                           |               |   | (30,821        | ) |               | 9,641  |                |   | 6,554  | 
|                          | Net income (loss) applicable to common shareholders                                         |               |   | (26,460        | ) |               | 8,859  |                |   | 5,773  | 
|                          | Diluted earnings (loss) per share                                                           |               |   | (1.07          | ) |               | 0.35   |                |   | 0.23   | 
|Other Data:               |                                                                                             |               |   |                |   |               |        |                |   |        | 
|                          | Recurring funds from operations(2)                                                          |               |   | 14,988         |   |               | 16,918 |                |   | 12,414 | 
|                          | Weighted average common shares, partnership units and potential dilutive shares outstanding |               |   | 27,468         |   |               | 27,474 |                |   | 27,722 | 
|                          | Dividends paid per share                                                                    |               |   | 0.385          |   |               | 0.385  |                |   | 0.385  | 

22

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|                      |                                                                 | First Quarter |   | Second Quarter |   | Third Quarter |        | Fourth Quarter |   | Total  | 
|--------------------- | --------------------------------------------------------------- | ------------- | - | -------------- | - | ------------- | ------ | -------------- | - | ------ | 
|RFS PARTNERSHIP, L.P. |                                                                 |               |   |                |   |               |        |                |   |        | 
|2002:                 |                                                                 |               |   |                |   |               |        |                |   |        | 
|                      | Operating Data:                                                 |               |   |                |   |               |        |                |   |        | 
|                      | Total revenue                                                   |               | $ | 47,277         |   | $             | 53,628 |                | $ | 52,975 | 
|                      | Net income (loss)                                               |               |   | (8,343         | ) |               | 3,888  |                |   | 3,650  | 
|                      | Net income (loss) applicable to unitholders                     |               |   | (9,124         | ) |               | 1,217  |                |   | 3,650  | 
|                      | Diluted earnings (loss) per unit                                |               |   | (0.32          | ) |               | 0.04   |                |   | 0.12   | 
|Other Data:           |                                                                 |               |   |                |   |               |        |                |   |        | 
|                      | Recurring funds from operations(2)                              |               |   | 7,849          |   |               | 11,350 |                |   | 10,449 | 
|                      | Weighted average units and potential dilutive units outstanding |               |   | 28,353         |   |               | 29,676 |                |   | 30,970 | 
|                      | Dividends paid per unit                                         |               |   | 0.25           |   |               | 0.25   |                |   | 0.25   | 
|2001:                 |                                                                 |               |   |                |   |               |        |                |   |        | 
|                      | Operating Data:                                                 |               |   |                |   |               |        |                |   |        | 
|                      | Total revenue                                                   |               | $ | 57,593         |   | $             | 59,864 |                | $ | 54,981 | 
|                      | Net income (loss)                                               |               |   | (33,268        | ) |               | 10,328 |                |   | 7,148  | 
|                      | Net income (loss) applicable to unitholders                     |               |   | (28,907        | ) |               | 9,546  |                |   | 6,367  | 
|                      | Diluted earnings (loss) per unit                                |               |   | (1.06          | ) |               | 0.35   |                |   | 0.23   | 
|Other Data:           |                                                                 |               |   |                |   |               |        |                |   |        | 
|                      | Recurring funds from operations(2)                              |               |   | 14,988         |   |               | 16,918 |                |   | 12,414 | 
|                      | Weighted average units and potential dilutive units outstanding |               |   | 27,468         |   |               | 27,474 |                |   | 27,722 | 
|                      | Dividends paid per unit                                         |               |   | 0.385          |   |               | 0.385  |                |   | 0.385  | 

---

23

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Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

Certain matters discussed herein may constitute forward-looking statements within the meaning of the federal securities law. Such statements may be identified by
words such as anticipate, believe, estimate, expect, intend, predict, will and hope or similar expressions. The Company and the Operating Partnership have based these forward-looking statements on
their current expectations, estimates and projections about future events and trends affecting the industry and markets in which the Company and the Operating Partnership operate, as well as the
financial condition of their business, which may prove to be incorrect. These forward-looking statements relate to future events, future financial performance, and involve known and unknown risks,
uncertainties and other factors which may cause the Company and the Operating Partnership's actual results, performance, achievements or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward looking statements. Future events and actual results could differ materially from those identified or contemplated by such
forward-looking statements. General economic conditions, including the timing and magnitude of recovery from the current economic downturn, future acts of terrorism or war, risks associated with the
hotel and hospitality business, the availability of capital, and numerous other factors may affect the Company and the Operating Partnership's future results, performance and achievements. Many of
these factors are discussed in detail under "BusinessRisk Factors" in this Form 10-K and should be carefully read. Except as required by the federal securities laws,
the Company and the Operating Partnership disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report on
Form 10-K to reflect any change in the Company and Operating Partnership's expectations with regard thereto or any change in events, conditions or circumstances on which any such
statement is based. Although the Company and the Operating Partnership believe current expectations are based upon reasonable assumptions, the Company and the Operating Partnership can give no
assurance that expectations will be attained or that actual results will not differ materially.

General

RFS is a publicly held hotel real estate investment trust, which at December 31, 2002, owned interests in 57 Hotels with 8,271 rooms located in 24 states
and an approximate 92% interest in the Operating Partnership. The Operating Partnership is the issuer of public debt. Because RFS is the issuer of publicly held common stock and the Operating
Partnership is the issuer of publicly held debt, both entities are required to file Form 10K's, either separately or combined. This Form 10K represents a combined Form 10K for
both RFS and the Operating Partnership. RFS, the Operating Partnership, and their subsidiaries are herein referred to, collectively, as the "Company." Unless management's

24

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discussion and analysis specifically refers to either RFS or the Operating Partnership, the discussion and analysis is applicable to both RFS and the Operating Partnership as separate registrants.

In
2002, the Company received 36% of its EBITDA from full service hotels, 37% from extended stay hotels and 27% from limited service hotels. The Company received 59% of its EBITDA in
five states: California (30%), Florida (10%), Texas (9%), Michigan (5%) and Illinois (5%).

The
following summarizes additional information for the 57 hotels owned at December 31, 2002:

Franchise Affiliation

Hotel Properties

Rooms/Suites

2002 EBITDAFull Service Hotels:Sheraton

4

864

$
8,056Holiday Inn

5

954


7,210Sheraton Four Points

2

412


3,356Doubletree

1

221


2,014Independent

2

331


1,848Hilton

1

234


1,36315

3,016


23,847Extended Stay Hotels:Residence Inn by Marriott

14

1,852


21,460TownePlace Suites by Marriott

3

285


2,220Homewood Suites by Hilton

1

83


53618

2,220


24,216Limited Service Hotels:Hampton Inn

17

2,112


12,406Holiday Inn Express

5

637


3,408Courtyard by Marriott

1

102


823Comfort Inn

1

184


81324

3,035


17,450Total

57

8,271

$
65,513


---

The
following summarizes the number of hotels owned for the periods presented:

2002

2001

2000Hotels owned at beginning of years

58

60

62Sales of hotels

(1
)
(2
)
(2
)Hotels owned at end of years

57

58

60


During
2000, the Company sold the 280-room Hawthorn Suites in Atlanta for $20.8 million, resulting in a nominal gain, and the 124-room Hampton Inn in
Warren, Michigan for $5.4 million, resulting in a gain on the sale of $0.7 million. Sales proceeds were used to finance a portion of the Hilton lease termination on January 1,
2001.

During
2001, the Company sold the 131-room Hampton Inn in Plano, Texas for $5.5 million, resulting in a loss on sale of approximately $1.0 million and the
135-room Comfort Inn in Farmington Hills, Michigan for $6.6 million, resulting in a gain on sale of approximately $1.1 million. The net proceeds were used to reduce
borrowings under the Company's Line of Credit.

25

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In
2002, the Company sold the 153-room Comfort Inn in Fort Mill, South Carolina for $3.25 million, resulting in a loss on sale of approximately $3.8 million.
The net proceeds were used to reduce borrowings under the Company's Line of Credit.

At
December 31, 2002, the Company leased five hotels to two third-party lessees. Fifty hotels are managed by Flagstone and the remaining seven hotels are managed by four other
third-party management companies.

Results of Operations



Revenue

Revenue decreased 9.7% from $220.2 million to $198.9 million primarily due to the softness in business travel resulting from the lagging economy and
the geo-political uncertainty. The continued impact from the economic recession, the geo-political uncertainty and the decline in corporate profits have forced corporations to
reduce business travel which has a significant impact on lodging demand. Revenue per available room at our 56 comparable hotels (excludes the Hotel Rex in San Francisco, California which is currently
closed for earthquake retrofit and renovation) declined 8.5% due to a 6.1% decline in average daily rate and a decline in occupancy of 1.7 percentage points. The decline in revenue per
available room has improved incrementally each quarter of 2002 as compared to 2001 with revenue per available room declining 16.6% in the first quarter, 10.6% in the second quarter, 4.1% in the third
quarter and 1.6% in the fourth quarter. Revenue per available room for the full service, extended stay and limited service hotel portfolios showed decreases in revenue per available room of 13.9%,
4.6% and 5.0%, respectively.

As
reported by Smith Travel Research, for the year, the San Francisco/San Mateo Metropolitan Service Area ("MSA") was the worst performing MSA of the top 25 markets in the United States
in terms of the change in revenue per available room as compared to the prior year with a decline of approximately 17.4%. Furthermore, the San Jose/Santa Cruz MSA in Silicon Valley, which is not one
of the top 25 markets as defined by Smith Travel, performed even worse with a change in revenue per available room of approximately 22.0%. The Company's five comparable northern California properties
experienced an average decline in revenue per available room of 22.3%. In San Francisco, the Hilton Fisherman's Wharf experienced a decline in revenue per available room of 9.3% for the year, while at
our four Silicon Valley hotels, revenue per available room decreased 26.2% for the year. The continued deterioration in year over year revenue per available room in both MSA's was due to the downturn
in the technology and telecommunications industries, a weak convention calendar and a lack of business travelers, both domestic and international. Excluding the five comparable northern California
properties, revenue per available room declined approximately 5.1%, which compares to the industry's decline of 2.5%, as reported by Smith Travel Research.

The
Company hopes to benefit in the future from the expected decline in new supply growth as predicted by Smith Travel Research, which combined with an economic turnaround may create
increased lodging demand for our hotels. This may lead to growth in revenue per available room, net income and dividends. The following shows hotel operating statistics for the 56 comparable hotels
for the year ended December 31, 2002.

26

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COMPARABLE HOTELS OPERATING STATISTICS  For The Year Ended December 31, 2002

|                |  | ADR |       | OCCUPANCY |         | Revenue Per
Available Room
|--------------- |  | --- | ----- | --------- | ------- | --------------------------
|
|Full Service    |  | $   | 97.16 |           | (11.6)% |                           
|Extended Stay   |  |     | 94.05 |           | (2.6)%  |                           
|Limited Service |  |     | 69.82 |           | (2.3)%  |                           
|                |  |     |       |           |         |                           
|Total           |  | $   | 86.43 |           | (6.1)%  |                           
|                |  |     |       |           |         |                           

The
Company's full service hotels, which comprised approximately 36% of trailing twelve month earnings before interest, taxes, depreciation and amortization ("TTM EBITDA"), experienced
an average decrease in revenue per available room of 13.9%. This decrease was caused by a year to date decrease in occupancy of 1.7 percentage points and an 11.6% decline in average daily rate.
The five comparable northern California hotels previously mentioned make up a substantial portion of these decreases. Excluding the five northern California properties, revenue per available room at
the Company's other full service hotels decreased approximately 5.8% for the year. The following six full service hotels located in Silicon Valley and San Francisco had decreases in revenue per
available room for 2002 averaging approximately 22% (data for the Hotel Rex is through October 31, 2002 as it was closed in November, 2002 for the earthquake retrofit and renovation).

Hotel

Location

Variance vs. 2001173-room Sheraton

Sunnyvale, CA

(23.3)%235-room Beverly Heritage

Milpitas, CA

(41.8)%229-room Sheraton

Milpitas, CA

(23.4)%214-room Sheraton Four Points

Pleasanton, CA

(14.4)%234-room Hilton

San Francisco, CA

(9.3)%94-room Hotel Rex

San Francisco, CA

(22.9)%


In
Silicon Valley, where the Company has four full service hotels, the hotel guests are predominantly domestic and international business travelers. These hotels have been hit the
hardest of all hotels in the Company's portfolio because of the lack of business travel. Furthermore, there is little leisure demand for hotels in the Silicon Valley market that would temper the
significant drop-off in business travel.

Conversely,
within San Francisco, the Hilton Fisherman's Wharf is driven predominantly by leisure demand, with business travelers and groups making up the balance in room demand.
Accordingly, this hotel experienced the smallest decline in revenue per available room among all of the Company's northern California hotels in terms of revenue per available room, as seen above.

The
Hotel Rex at Union Square has shown less improvement in 2002 than the Hilton Fisherman's Wharf. Because of its location within San Francisco at Union Square, this hotel is more
reliant on business travelers and city-wide conventions and so it has performed worse than the Hilton Fisherman's Wharf. As such, the Company decided to accelerate the timing of its
$1.5 million earthquake retrofit and renovation and closed the hotel in November, 2002. Originally, the Company anticipated performing this renovation in late 2003. The work is required to be
performed by early 2005 in order to comply with existing building codes. The Rex will be completely closed from November 2002 to February 2003. Portions of the hotel are being
re-opened as completed but the full hotel renovation and retrofit will not be completed until April 2003. The re-opening will coincide with the re-opening of
the Moscone Center, where the Convention and Visitors Bureau has begun booking large events into

27

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the Center in May 2003. The Company believes that accelerating the renovation to this slow period has enabled it to decrease the Company's renovation and retrofit costs as the lost revenue
that will occur due to the hotel's closure is at typically the hotel's slowest period. Also, the Company believes it has been able to aggressively negotiate the terms of the retrofit since the Company
feels the costs to complete this type of work will rise as the deadline nears and demand for retrofit work increases.

The
extended stay hotels, which comprised approximately 37% of TTM EBITDA, experienced a decline in revenue per available room of 4.6%. In 2002 this market segment performed the best in
terms of revenue per available room versus the prior year. Fourteen of the eighteen extended stay properties are Residence Inns by Marriott, which experienced a decrease in revenue per available room
of 5.0%. The Company believes that Residence Inns by Marriott is the extended stay brand of choice for consumers as these hotels benefit from longer duration stays that include the typically slower
weekend days. Similarly most of the extended stay portfolio, with the exception of the 176-room Residence Inn in Orlando, are in markets that can best be categorized as drive to markets.
These hotels have been less affected by the events of the slowing economy and the geo-political uncertainty with revenue per available room declining 4.2%. The Orlando Residence Inn has
experienced a decline in revenue per available room of 12.7%.

The
limited service hotels, which comprised approximately 27% of TTM EBITDA, experienced a decrease in revenue per available room of 5.0%. Seventeen of the twenty-six limited
service hotels are Hampton Inns, which experienced a decline in revenue per available room of 3.3%. System-wide revenue per available room at Hampton Inns increased 0.4% for the year,
which was the only Hilton brand to show an improvement in revenue per available room from 2001. During the fourth quarter of 2002 and early 2003, the Company completed product improvement plans on
sixteen Hampton Inns in our portfolio, which should well position these hotels to better compete for existing business as well as the potential rebound in the hotel industry. Five of the limited
service hotels are Holiday Inn Express', which experienced a decline in revenue per available room of 9.4% for the year.

Expenses

Total operating expenses decreased $70.4 million due primarily to the lease termination expense of $65.5 million in 2001. Excluding lease
termination expense, total operating expenses decreased $5.0 million or 2.9% and operating margins (operating income as a percentage of total hotel revenue) decreased 4.8 points to 17.2% from
23.0%, driven by the decrease in revenue of 9.7%. Individual line items comprising hotel operating expenses are discussed below.

Hotel
operating expenses for rooms, food and beverage and other operating departments decreased 5.7% to $49.3 million from $52.3 million; however, as a percentage of total
hotel revenue, hotel operating expenses increased to 24.8% in 2002 versus 23.8% in 2001. As occupancy has decreased only slightly, the hotels must incur costs to service these rooms and since this
occupancy is now booked at reduced room rates over the prior year, the operating margins continue to deteriorate. Cost reductions that were implemented in 2001 and which continued in 2002 have not
fully offset the loss in revenue.

Property
operating costs, which includes complimentary guest services, marketing, energy, operating leases, and other operating costs, decreased $0.2 million or 1.8% due primarily
to a decrease in energy costs of $0.4 million or 4.4%. Energy costs have decreased across the portfolio with a substantial portion of the decrease coming from our California properties. Energy
costs at the ten California properties decreased $0.2 million or 6.2% for the year. Energy costs in California were higher in the first half of 2001 due to the well-publicized
energy crisis in that state.

Property
taxes, insurance and other expenses decreased $0.4 million or 1.8% driven primarily by a decrease in real estate taxes of approximately $0.9 million resulting from
reduced assessments through appeals made by the Company and assessor adjustments reflecting the lagging hotel industry. Offsetting

28

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the decrease in real estate taxes of $0.9 million are increases in earthquake and property insurance of $0.5 million. Insurance costs continue to rise as a result of rate hardening in
the market, modifications of insurance coverage to include terrorist activities and other changes in insurance pricing out of the Company's control. The increase is not due to a deterioration of
claims experience or an increase in the value of insured losses, which have been stable.

Franchise
costs decreased $0.6 million or 3.5% due to the decrease in occupied rooms of 55,298 rooms or 2.6%.

Maintenance
and repair costs decreased $0.1 million or 1.0% due to the decreased occupancy previously explained.

Management
fees have decreased $0.8 million or 14.8% due primarily to the decrease in revenues. Management fees have remained flat at 2.5% to 2.6% of total hotel revenue in 2002
and 2001.

Depreciation
increased to $29.8 million from $29.3 million. The Company expected depreciation to increase and level off after the substantial capital expenditures made in
prior years.

Lease
termination costs of $65.5 million in 2001 represented the expenditures incurred in connection with the termination of the leases, management contracts and related ancillary
agreements with Hilton. For accounting purposes, this transaction represented the cancellation of executory contracts and was required to be expensed as incurred.

Amortization
of franchise fees and unearned compensation is down $0.1 million due to the decrease in the amortization of certain employee restricted stock awards that fully vested
in October 2001.

General
and administrative expenses have decreased $0.2 million or 1.0% due primarily to austerity programs implemented in the second and third quarters of 2001 at both the hotels
and corporate headquarters aimed at reducing these expenses.

Debt
extinguishment and swap termination costs of $10.1 million are comprised of a yield maintenance premium of $5.5 million to pay off the 1996 CMBS debt,
$3.2 million to terminate two interest rate swaps and $1.4 million to write-off the unamortized debt issuance costs related to the 1996 CMBS debt. These costs were incurred
in conjunction with the issuance of $125 million senior notes in February 2002.

Amortization
on loan origination costs have increased $0.3 due to the incremental amortization of costs associated with issuance of the $125 million senior notes in
February 2002 as compared to the amortization of debt issuance costs related to the 1996 CMBS debt for the same periods in 2001.

Interest
expense increased $0.8 million or 3.2% due to the increase in the year to date weighted average interest rate from approximately 7.9% in 2001 to 8.5% in 2002 and offset
by a decrease in the weighted average borrowings outstanding of $15.4 million from $313.6 million in 2001 to $298.2 million in 2002.

Minority
interest in income (loss) of Operating Partnership decreased $0.5 million due to the decrease in the net loss applicable to common shareholders, before minority interest,
of $5.0 million.

Benefit
from income taxes decreased $23.6 million as a result of the Hilton lease termination in the first quarter of 2001.

Discontinued
operations represents the earnings (losses) on the Comfort Inn in Fort Mill, South Carolina, which was sold on November 22, 2002 of $0.1 million in 2002 versus
a $(0.1) million in 2001 as well as the loss recognized on the sale of the Fort Mill hotel of $3.8 million. Statement of Financial Account Standard No. 144, Accounting for the Impairment
of Long-Lived Assets, requires the results of operations of sold hotels to be reported as discontinued operations. See Footnote 8 to the consolidated financial statements for a detail of
the revenues and expenses of the sold hotel.

29

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The
2002 gain on sale of assets relates to the sale of an interest in an unconsolidated partnership of $0.9 million. The 2001 gain relates to the sale of the Comfort Inn in
Farmington Hills, Michigan.

Net loss applicable to common shareholdersRFS

Net loss applicable to common shareholders was $(7.2) million and $(11.7) million in 2002 and 2001, respectively. The $4.5 million decrease in net loss is
attributable primarily to the increase in operating income of $49.1 million, offset by the decrease in benefit from income taxes of $23.6 million, the gain on the redemption of the
Series A Preferred Stock in 2001of $5.1 million, the loss on redemption of the Series B Preferred Stock in 2002 of $1.9 million, the loss on sale of assets in 2002 of
$2.9 million versus a gain of $1.1 million in 2001 and the debt extinguishment and swap termination costs of $10.1 million in 2002.

Net loss applicable to unitholdersPartnership

Net loss applicable to unitholders was $(7.9) million and $(12.9) million in 2002 and 2001, respectively. The $5.0 million decrease in net loss is
attributable primarily to the increase in operating income of
$49.1 million, offset by the decrease in benefit from income taxes of $23.6 million, the gain on the redemption of the Series A Preferred Units in 2001 of $5.1 million, the
loss on redemption of the Series B Preferred Stock in 2002 of $1.9 million, the loss on sale of assets in 2002 of $2.9 million versus a gain of $1.1 million in 2001 and the
debt extinguishment and swap termination costs of $10.1 million in 2002.



For the year ended December 31, 2000, the Company leased 56 hotels to third parties and reported percentage lease revenue. In connection with the Hilton
lease termination transaction, effective January 1, 2001, the Company leased 51 of these hotels to theTRS Lessees. Effective January 1, 2001, the Company also leased four additional
hotels, that were not previously leased, to the TRS Lessees. The Company subsequently sold two hotels. As a result of these transactions, the TRS lessees leased 53 hotels and the Company reported
hotel operating revenues and expenses with regard to these hotels for the year ended December 31, 2001. Accordingly, the hotel revenues and operating expenses for 2001 are not directly
comparable to 2000, where the Company reported only percentage lease revenue from hotels. This discussion does not include the effects of the reclassification of the operating results of the Fort Mill
hotel, which is included in earnings (loss) from discontinued operations. Refer to the 2001 10K for the comparable statements of operations.

Revenues

Total revenue increased $114.5 million over 2000. The increase is principally a result of reporting hotel operating revenues compared to the percentage
lease revenue reported in the prior year.

Expenses

Total operating expenses increased $191.7 million. This increase is associated with reporting hotel operating expenses in 2001.

Property
taxes, insurance and other expenses increased $2.1 million or 19.5%, due primarily to the inclusion of hotel operating costs (liability insurance of $1.0 million
and personal property taxes of $0.7 million) in 2001. The remainder of the variance relates to increase in earthquake insurance ($0.3 million), and property insurance
($0.1 million).

Depreciation
increased 8.8% due to the increase in depreciable assets resulting from renovation expenditures at certain of the hotels, including the Hilton San Francisco Fisherman's
Wharf.

30

---

The
lease termination expenses of $65.5 million represents the expenditures incurred in connection with the termination of the leases, management contracts and related ancillary
agreements with Hilton. For accounting purposes, this transaction represented the cancellation of executory contracts and was required to be expensed as incurred.

Amortization
of deferred expenses and unearned compensation increased $0.7 million over 2000 due to stock grants in 2001.

General
and administrative expenses increased $13.1 million due primarily to the inclusion of hotel general and administrative expenses of $15.2 million in 2001, offset by
a decrease of $2.1 million in corporate general and administrative expenses. In the second and third quarters of 2001, the Company implemented austerity programs aimed at reducing these
expenses as well as hotel operating expenses, which provided a $1.0 million favorable variance versus 2000. In addition, the Company reduced executive bonuses for 2001 by $0.6 million as
compared to 2000. The remainder of the variance relates to the first quarter 2000, when the Company wrote off development and due diligence costs for potential projects that the Company decided not to
pursue of $0.2 million and incurred severance expense of approximately $0.3 million associated with a former employee.

Interest
expense increased $2.0 million due to a weighted average increase in borrowings of approximately $19.5 million as well as an increase in the weighted average
interest rate on borrowings outstanding on the line of credit from 7.6% in 2000 to 7.9% in 2001. In addition, amortization of debt issue costs increased $0.3 million due to the costs incurred
to issue new debt in 2000 and complete amendments to the line of credit. Borrowings increased primarily to fund the lease termination costs as well as renovation costs.

The
benefit from income taxes in 2001 relates to the $65.5 million book loss recorded by the TRS Lessees. This loss relates primarily to the lease termination payments.

Net Income (loss) applicable to common shareholders

Net income (loss) was $(11.7) million in 2001 and $29.4 million in 2000. The $41.1 million reduction in net income (loss) applicable to common
shareholders relates primarily to the $65.5 million lease termination expense offset by the related benefit from income taxes of $24.7 million. Included in the net loss applicable to
common shareholders in 2001 is a gain of $5.1 million recognized on the redemption of the Series A Preferred Stock.



During 2000, revenues primarily consisted of rental income from third-party lessees. As a result of the previously discussed termination of the leases and related
agreements with Hilton, beginning January 1, 2001, the consolidated results of operations primarily reflect hotel-related revenues and operating costs. As a result, a comparison of historical
results for the year ended December 31, 2001 to the year ended December 31, 2000 would not be as meaningful as a discussion of the actual 2001 results, as reported in the 2001
Form 10-K which has been reclassified in the 2002 Form 10-K, versus 2000 pro forma results. Accordingly, the Company has included a discussion of the actual year
ended December 31, 2001 versus a pro forma year ended December 31, 2000. A reconciliation of actual results for 2000 to pro forma results is included in the
Form 8-K/A, dated January 1, 2001, filed on March 19, 2001. The pro forma results of operations for the year ended December 31, 2000 assumes that the following
occurred on January 1, 2000:



31

---



|                                                                                        |                                                             | Actual
2001              |         | Pro Forma
2000 |        
|--------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------ | ------- | -------------- | -------
|Revenue:                                                                                |                                                             |                          |         |                |        
|                                                                                        | Rooms                                                       |                          | $       | 188,725        |        
|                                                                                        | Food and beverage                                           |                          |         | 17,695         |        
|                                                                                        | Other operating departments                                 |                          |         | 9,103          |        
|                                                                                        | Lease revenue                                               |                          |         | 5,782          |        
|                                                                                        | Other                                                       |                          |         | 573            |        
|                                                                                        |                                                             |                          |         |                |        
|                                                                                        |                                                             | Total hotel revenue      |         |                | 221,878
|                                                                                        |                                                             |                          |         |                |        
|Hotel operating expenses:                                                               |                                                             |                          |         |                |        
|                                                                                        | Rooms                                                       |                          |         | 37,000         |        
|                                                                                        | Food and beverage                                           |                          |         | 13,533         |        
|                                                                                        | Other operating departments                                 |                          |         | 2,201          |        
|Undistributed operating expenses:                                                       |                                                             |                          |         |                |        
|                                                                                        | Property operating costs                                    |                          |         | 22,550         |        
|                                                                                        | Property taxes, insurance and other                         |                          |         | 12,848         |        
|                                                                                        | Franchise costs                                             |                          |         | 17,007         |        
|                                                                                        | Maintenance and repair                                      |                          |         | 9,741          |        
|                                                                                        | Management fees                                             |                          |         | 5,762          |        
|                                                                                        | Depreciation                                                |                          |         | 29,605         |        
|                                                                                        | Lease termination                                           |                          |         | 65,496         |        
|                                                                                        | Amortization of deferred expenses and unearned compensation |                          |         | 1,384          |        
|                                                                                        | General and administrative                                  |                          |         | 19,436         |        
|                                                                                        |                                                             |                          |         |                |        
|                                                                                        |                                                             | Total operating expenses |         |                | 236,563
|                                                                                        |                                                             |                          |         |                |        
|Operating income (loss)                                                                 |                                                             |                          | (14,685 | )              |        
|                                                                                        | Interest expense                                            |                          |         | 26,042         |        
|                                                                                        |                                                             |                          |         |                |        
|Income (loss) before minority interest, (gain) loss on sale of hotels, and income taxes |                                                             |                          | (40,727 | )              |        
|                                                                                        | Minority interests                                          |                          |         | (1,157         | )      
|                                                                                        | (Gain) loss on sale of hotel properties                     |                          |         | (1,127         | )      
|                                                                                        | Provision for (benefit from) income taxes                   |                          |         | (24,714        | )      
|                                                                                        |                                                             |                          |         |                |        
|Net income (loss)                                                                       |                                                             |                          | (13,729 | )              |        
|                                                                                        | Preferred stock dividends                                   |                          |         | (3,125         | )      
|                                                                                        | Gain on redemption of Series A preferred Stock              |                          |         | 5,141          |        
|                                                                                        |                                                             |                          |         |                |        
|Net income (loss) applicable to common shareholders                                     |                                                             | $                        | (11,713 | )              | $      
|                                                                                        |                                                             |                          |         |                |        

Revenues

Revenue decreased 6.1% from $236.2 million to $221.9 million primarily due to the slowing economy exacerbated by the terrorist activities of
September 11, 2001. Revenue per available room (RevPAR) at the 56 comparable hotels declined 4.6% due to a decline in occupancy of 3.3 percentage points and a decline in average daily
rate of 0.1%. The revenue decline of 6.1% resulted from weak third and fourth
quarters where RevPAR at the comparable hotels decreased 12.3% and 15.9%, respectively, promulgated by the significant decline in travel following the terrorist activities. Since the

32

---

week ended September 22, RevPAR has improved incrementally, albeit at levels well below 2000 levels. RevPAR for the full service, extended stay and limited service hotel portfolios showed
decreases in RevPAR of 10.4%, 1.3% and 0.3%, respectively from the comparable 2000 period. The comparable California hotels (9 of 10 hotels excluding the Hilton San Francisco Fisherman's Wharf which
was undergoing renovation in 2000) experienced an average RevPAR decrease of 9.9%. Excluding our California hotels, RevPAR decreased 1.8%. California hotels represented 36% of room revenue in 2001.
Within California, San Francisco and Silicon Valley generated approximately 22% of room revenue and the economy of this area has deteriorated rapidly in 2001, even prior to the events of
September 11, as a result of the dot-com implosion, the well-publicized energy crisis, a weak convention calendar and the poor Japanese economy.

The
following shows hotel operating statistics for the 56 comparable hotels for the year ended December 31, 2001. Excluded from the 56 comparable hotels are the Hilton San
Francisco Fisherman's Wharf hotel, which underwent renovation and was converted from a Ramada Plaza in 2000 and the Sheraton Hotel in Birmingham, Alabama, which was undergoing renovation in 2000.

COMPARABLE HOTELS OPERATING STATISTICS  For the Year Ended December 31, 2001

|                |  | ADR |        | OCCUPANCY |        | Revenue Per
Available Room
|--------------- |  | --- | ------ | --------- | ------ | --------------------------
|
|Full Service    |  | $   | 108.52 |           | (2.0)% |                           
|Extended Stay   |  |     | 96.55  |           | 2.0%   |                           
|Limited Service |  |     | 70.91  |           | 1.8%   |                           
|                |  |     |        |           |        |                           
|Total           |  | $   | 90.50  |           | (0.1)% |                           
|                |  |     |        |           |        |                           

The
comparable full service hotels (year to date excludes the Hilton San Francisco Fisherman's Wharf and the Sheraton hotel in Birmingham) produced an average RevPAR decrease of 10.4%
year to date. The following six full service hotels located in Silicon Valley and San Francisco had RevPAR changes for the year ending December 31, 2001 as follows:

Hotel

Location

RevPAR Change173-room Sheraton

Sunnyvale, CA

(15.0
)%237-room Beverly Heritage

Milpitas, CA

(18.4
)%229-room Sheraton

Milpitas, CA

(13.1
)%214-room Sheraton Four Points

Pleasanton, CA

(9.4
)%234-room Hilton

San Francisco, CA

(9.6
)%94-room Hotel Rex

San Francisco, CA

(31.0
)%


As
explained previously, coupled with the events of September 11, the Silicon Valley and San Francisco markets have declined due to deteriorating economic conditions, particularly
in the technology sector, and this adversely affected the operating results of these hotels.

The
extended stay hotels, which comprised approximately 33% of EBITDA, experienced a decline in RevPAR of 1.3%. Fourteen of the 18 extended stay properties are Residence Inns by
Marriott, which experienced a decrease in RevPAR of 1.2%. The Company believes that Residence Inns by Marriott is the extended stay brand of choice for consumers as these hotels benefit from longer
duration stays that include the typically slower weekend days. Similarly, most of the extended stay hotels, with the exception of our 176-room Residence Inn in Orlando, are in markets that
can be categorized as "drive to" markets rather than air travel markets. These hotels have been less affected by the events of

33

---

September 11, with RevPAR declines of 11.4% since September 11, as our extended stay hotels have performed with less volatility than many of our full service hotels in a slowing market.

The
limited service hotels, which comprised approximately 25% of EBITDA, experienced a decrease in RevPAR of 0.3%. This market segment performed the best in terms of RevPAR versus the
prior year. Seventeen of the 26 limited service hotels are Hampton Inns, which the Company believes is the best upscale limited service brand. These Hampton Inns produced a RevPAR increase of 3.6%
from
increases in occupancy of 0.2 points and ADR of 3.3%, respectively. These results are due to a combination of a slowing rate of increase in limited service room supply and increased demand resulting
from a slowing economy that translated into guests trading down in price point to stay at limited service hotels. Like the extended stay hotels, these hotels have been less impacted by the events of
September 11 than full service hotels.

Food
and beverage revenue decreased $2.0 million or 10.1%, directly attributable to the decrease in RevPAR of 10.4% on the full service portfolio. Revenue from other operating
departments decreased $0.7 million or 7.1% as a result of fewer guests staying at all of the hotels, where RevPAR decreased 5.6%.

Expenses

Total operating expenses increased $65.9 million due primarily to the lease termination expense of $65.5 million. Excluding the lease termination
expense, operating margins (operating income as a percentage of total hotel revenue) decreased 4.9 points to 22.9% from 27.8%, driven by the decrease in revenue of 6.1%. Individual line items
comprising hotel operating expenses are discussed below.

Hotel
operating expenses for rooms, food and beverage and other operating departments decreased 4.1% to $52.7 million from $55.0 million; however, as a percentage of total
hotel revenue, hotel operating expenses increased to 23.8% in 2001 versus 23.3% in 2000. The increased percentage was due to the tight labor market conditions which resulted in an increased wage rate,
but were partially offset by head count reductions that were made as the economy slowed throughout the year.

Property
operating costs decreased $0.5 million or 2.2% due primarily to a decrease in other capital expenses and operating leases of $1.0 million, offset by an increase in
energy costs of 7.3% due primarily to the California energy crisis earlier in the year. At our ten California properties, energy costs rose 15.4%. The Company implemented several initiatives,
including the use of high efficiency lighting, to lessen the impact of increased energy costs going forward.

Property
taxes, insurance and other expenses increased $1.0 million or 9.2%, driven primarily by increased costs of all types of insurance, including liability insurance
($0.4 million), earthquake insurance ($0.3 million), and property insurance ($0.1 million). The remainder of the variance ($0.2 million) is attributable to increased
personal property taxes resulting from the significant renovations at certain hotels.

Franchise
costs increased $0.9 million or 5.2% due primarily to the brands frequency programs (specifically the Hilton HHonors® program which is now accepted at our
Hampton Inns). While these increasing costs are not directly attributable to increased revenues, the Company has seen a beneficial effect on RevPAR at our limited service hotels.

Depreciation
increased 11.4% due to the increase in depreciable assets resulting from capital improvements at certain of our hotels, including the Hilton San Francisco Fisherman's Wharf.
As a percentage of hotel revenue, depreciation increased from 11.3% to 13.3%. The Company is substantially finished with major renovations and expects depreciation increases to level off.

The
lease termination costs of $65.5 million represent the expenditures incurred in connection with the termination of the leases, management contracts and related ancillary
agreements with Hilton. For

34

---

accounting purposes, this transaction represented the cancellation of executory contracts and was required to be expensed as incurred.

Amortization
of deferred expenses and unearned compensation increased $0.7 million as a result of stock grants in January 2001.

General
and administrative expenses decreased $2.5 million due primarily to the decrease in corporate general and administrative expenses of $2.1 million to 1.9% from 2.7%
of hotel revenue. In the second and third quarters of 2001, the Company implemented austerity programs aimed at reducing these expenses as well as hotel operating expenses, which provided a
$1.0 million favorable variance versus 2000. In addition, the Company reduced executive bonuses for 2001 by $0.6 million as compared to 2000. The remainder of the variance relates to the
first quarter of 2000, when the Company wrote off development and due diligence costs of $0.2 million for potential projects that the Company decided not to pursue and incurred severance
expense of approximately $0.3 million associated with a former employee.

Interest
expense increased $0.6 million or 2.3% due to the increase in the weighted average interest rate on borrowings outstanding on the line of credit from 7.6% in 2000 to 7.9%
in 2001. In addition, amortization of debt issue costs increased $0.3 million due to the costs incurred to issue new debt in 2000 and complete amendments to the line of credit.

The
benefit from income taxes in 2001 relates to the $65.5 million book loss recorded by the TRS Lessees relating primarily to the Hilton lease termination.

Net Income (loss) applicable to common shareholders

Net income (loss) applicable to common shareholders was $(11.7) million in 2001 and $26.7 million in 2000. The $38.4 million reduction in net income
(loss) applicable to common shareholders relates
primarily to the $65.5 million lease termination expense net of the related benefit from income taxes of $24.7 million. Included in the net loss applicable to common shareholders is a
gain of $5.1 million recognized on the redemption of the Series A Preferred Stock from Hilton in 2001.

Funds from Operations and EBITDA

The Company considers Funds From Operations ("FFO") and EBITDA to be appropriate measures of a REIT's performance that should be considered along with, but not as
an alternative to, net income and cash flow as a measure of the Company's operating performance and liquidity.

The
National Association of Real Estate Investment Trusts (NAREIT), defines FFO as net income (computed in accordance with generally accepted accounting principles or GAAP), excluding
extraordinary items as defined by GAAP, and gains (or losses) from sales of depreciable operating property, plus real estate related depreciation and amortization and after comparable adjustments for
the Company's portion of these items related to unconsolidated partnerships and joint ventures.

Recurring
FFO represents FFO, as defined by NAREIT, adjusted for significant non-recurring items including lease termination costs, debt extinguishment and swap termination
costs and deferred income taxes. However, recurring FFO and EBITDA as presented may not be comparable to amounts calculated by other companies. Recurring FFO and EBITDA do not represent cash flows
from operations as determined by GAAP and should not be considered as an alternative to net income as an indication of the Company's financial performance or to cash flow from operating activities
determined in accordance with GAAP as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions.
Recurring FFO and EBITDA is the same for both RFS and the Partnership.

35

---



The following details the computation of recurring FFO based on the RFS Consolidated Statement of Operations and Note 8, Discontinued Operations, to the consolidated financial
statements for the years ended December 31 (in thousands):

2002

2001

2000Net income (loss)

$
(3,788
)
$
(13,729
)
$
30,790Minority interest in Operating Partnership


(644
)

(1,157
)

3,218Depreciation (1)


30,080


29,605


27,198Debt extinguishment and swap termination costs


10,122(Gain) loss on sale of assets (1)


2,890


(1,127
)

4,376Hilton lease termination (1)





65,496Deferred income taxes


(1,096
)

(24,734
)Preferred stock dividends


(1,562
)

(3,125
)

(1,412
)Recurring FFO

$
36,002

$
51,229

$
64,170Weighted average common shares, partnership units and potential dilutive shares outstanding (2)


29,990


27,655


27,127


---

2002

2001

2000Weighted average:Common shares outstanding

27,446

25,045

24,559Partnership units outstanding

2,459

2,475

2,562Shares issuable upon exercise of options

85

135

6Weighted average shares, partnership units and potential dilutive shares (3)

29,990

27,655

27,127


---

The
following details the computation of EBITDA for the year ended December 31 (in thousands):

2002

2001

2000Recurring FFO

$
36,002

$
51,229

$
64,170Interest expense


25,484


24,688


23,016Amortization


2,864


2,738


1,710Current income taxes





20Preferred stock dividends


1,562


3,125


1,412EBITDA

$
65,912

$
81,800

$
90,308


Liquidity and Capital Resources

The Company's principal source of liquidity to meet its cash requirements, including distributions to shareholders and repayments of indebtedness, is its share of
the Operating Partnership's cash flow. For the year ended December 31, 2002, cash flow provided by operating activities was $36.5 million. The Company believes that cash provided by
operating activities will be adequate to meet some of its

36

---

liquidity needs for the foreseeable future. The Company currently expects to fund its strategic objectives and any other liquidity needs by borrowing on its Line of Credit, exchanging equity for
hotel properties or possibly accessing the capital markets as market conditions permit. At December 31, 2002, the Company had $1.9 million of cash and cash equivalents and had borrowed
$7.0 million under its $140.0 million Line of Credit. The amount available under the Company's Line of Credit is subject to borrowing base values, as calculated in accordance with the
terms of the Line of Credit, which value from time to time may be less than the maximum $140 million. At December 31, 2002, the Company had $86.4 million available for additional
borrowings under its Line of Credit.

On
February 20, 2002, the Company sold 1.15 million shares of common stock. Proceeds of approximately $14.2 million (net of $0.2 million expenses) from the
sale of the Common Stock were used to reduce the outstanding balance on the Line of Credit.

On
February 26, 2002, the Operating Partnership sold $125 million of senior notes. The senior notes mature March 1, 2012 and bear interest at a rate of 9.75% per
year, payable semi-annually, in arrears, on March 1 and September 1 of each year, commencing as of September 1, 2002. The senior notes are unsecured obligations of the
Operating Partnership and are guaranteed by RFS and certain of its wholly-owned subsidiaries. The senior notes contain covenants that could, among other things, restrict the Company's ability to
borrow money, pay dividends on or repurchase capital stock, make investments, and sell assets or enter into mergers and consolidations. The Operating Partnership was in compliance with these covenants
at December 31, 2002. Net proceeds from the issuance of the senior notes of $121.5 million were used to retire the 1996 CMBS mortgage debt on March 20, 2002 ($57.5 million
outstanding), pay the prepayment penalty on the 1996 CMBS mortgage debt of approximately $5.5 million, terminate the two outstanding interest rate swap agreements for approximately
$3.2 million, with the balance used to reduce outstanding borrowings under the Line of Credit. As a result of the prepayment of the 1996 CMBS debt, the Partnership expensed $1.4 million
in unamortized debt costs. See Notes 4 and 11 to the Consolidated Financial Statements for additional detail regarding the senior notes and the guarantors thereof.

On
June 4, 2002, the Company sold 2.0 million shares of Common Stock. Proceeds of approximately $24.6 million (net of $0.1 million expenses) from the sale of
the Common Stock, together with available cash, were used to repurchase on June 28, 2002 all of the 250,000 outstanding shares of our Series B Preferred stock for an aggregate purchase
price of $25,850,000, excluding accrued dividends. Dividends on the Series B Preferred stock were paid through June 30, 2002. The Series B Preferred stock paid an annual dividend
of 12.5%. The Company expensed in the second quarter $1.9 million in costs associated with the repurchase, comprised of $0.9 million related to prepayment costs and $1.0 million
in issuance costs.

The
following details the Company's debt outstanding at December 31, 2002 (dollar amounts in thousands):

|               |  |   |         |  |               |  |          |  |               | Collateral
|-------------- |  | - | ------- |  | ------------- |  | -------- |  | ------------- | ----------
|
|Line of Credit |  | $ | 6,950   |  | LIBOR + 250bp |  | Variable |  | July 2005     |           
|Senior Notes   |  |   | 125,000 |  | 9.75%         |  | Fixed    |  | March 2012    |           
|Mortgage       |  |   | 90,600  |  | 7.83%         |  | Fixed    |  | December 2008 |           
|Mortgage       |  |   | 17,960  |  | 8.22%         |  | Fixed    |  | November 2007 |           
|Mortgage       |  |   | 50,719  |  | 8.00%         |  | Fixed    |  | August 2010   |           
|               |  |   |         |  |               |  |          |  |               |           
|               |  | $ | 291,229 |  |               |  |          |  |               |           
|               |  |   |         |  |               |  |          |  |               |           

37

---

The
interest rate on the $140 million Line of Credit ranges from 150 basis points to 250 basis points above LIBOR, depending on the Company's ratio of total debt to its investment
in hotel properties (as defined in the Line of Credit agreement). The average interest rate on outstanding contracts under the
Line of Credit was approximately 3.9% at December 31, 2002, including the current LIBOR spread of 250 basis points. The Line of Credit is collateralized by first priority mortgages on 24 hotels
that restrict the transfer, pledge or other hypothecation of the hotels (collectively, the "Collateral Pool"). The Company can obtain a release of the pledge of any hotel in the Collateral Pool if the
Company provides a substitute hotel or reduces the total availability under the Line of Credit. The Line of Credit contains various covenants including the maintenance of a minimum net worth, minimum
debt and interest coverage ratios, and total indebtedness and liability limitations. The Company was in compliance with these covenants at December 31, 2002. A summary of the most restrictive
covenants, along with the Company's corresponding value for each covenant, at December 31, 2002, are as follows:

Covenant Test

Covenant

ValueFixed charge coverage ratio must be equal to or greater than 1.75:1.00

1.75

1.91Interest coverage ratio must be equal to or greater than 2.00:1.00

2.00

2.27Collateral pool debt coverage ratio must be equal to or greater than 2.00:1.00

2.00

32.82Minimum net worth must be not less than $250,000,000

$250.0 million

$329.3 millionTotal indebtedness must be less than 5.5x TTM adjusted EBITDA

5.5x

5.0xLeverage must be less than or equal to 55%

55.0%

52.2%


The
Company's other borrowings are nonrecourse to the Company and contain provisions allowing for the substitution of collateral, upon satisfaction of certain conditions. Most of the
mortgage borrowings are prepayable and subject to various prepayment penalties, yield maintenance, or defeasance obligations. At December 31, 2002, approximately 98% of the Company's debt is
fixed at a weighted average interest rate of 8.7%.

Future
scheduled principal payments of debt obligations at December 31, 2002 are as follows (in thousands):

Amount2003

$
2,6952004


2,8882005


10,1112006


3,4242007


19,662Thereafter


252,449$
291,229


In
addition to the above principal payment of debt obligations as of December 31, 2002, the Company has a $3.0 million letter of credit outstanding. The letter of credit
serves as collateral on the worker's compensation plan for the benefit of the hotel employees of Flagstone. There are no outstanding balances on the letter of credit. The Company is also committed to
make future payments under various operating leases that are not significant.

38

---

Certain
significant credit statistics at December 31, 2002 and 2001 are as follows:

Credit Statistic

December 31, 2002

December 31, 2001EBITDA to interest expense(1)

2.6x

3.3xTotal debt to EBITDA

4.4x

3.7xWeighted average maturity of fixed rate debt

7.6 years

7.3 yearsRatio of fixed interest rate debt to total debt

98%

96%Ratio of debt to investment in hotel properties, at cost (2)

37%

38%


---

During
the year ended December 31, 2002, the Company spent $14.6 million on capital improvements to its hotels versus an initial plan of $9.0 million. The Company's
decision to retrofit the Hotel Rex in 2002, along with the decision to rebrand the Birmingham Sheraton to a Hilton, accelerated capital improvements approximately $2.0 million in 2002
(estimated total cost of both of these projects is approximately $3.0 million). The remainder of the increase in spending versus plan is due to the Company accelerating the completion of
product improvement plans at many of the Company's Hampton Inns. The Company believes that accelerating these improvements during an economic downturn when hotel travel is weak, resulting in lower
occupancy, average daily rate and revenue per available room, may benefit the performance of these hotels as the economy recovers. The Company expects to spend approximately $11.7 million
dollars on capital improvements in 2003.

The
Company expects to be able to meet its working capital, capital expenditure and debt service requirements through cash flow from operations and borrowings under the Line of Credit.
Borrowings under the Line of Credit bear interest at a floating rate based upon (and including spreads over), at our option, LIBOR or the Prime Rate. The Line of Credit also has various financial and
other covenants. Based on borrowing base calculations, at December 31, 2002, the Company had $86.4 million
of borrowing availability under the Line of Credit excluding outstanding letters of credit. Over the longer term, the Company's ability to generate sufficient cash flow from operations to make
scheduled payments on its debt obligations will depend on its future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside
of the Company's control. If the Company does not generate sufficient cash flow from operations to satisfy its debt obligations, the Company may have to undertake alternative financing plans. The
Company cannot assume that completion of any such alternative financing plans will be possible. The Company's inability to generate sufficient cash flow to satisfy its debt obligations or to refinance
its obligations on commercially reasonable terms would have an adverse effect on its business, financial condition and results of operations.

The
Company in the future may seek to increase further the amount of its credit facilities, negotiate additional credit facilities, or issue corporate debt instruments. Although the
Company has no charter restrictions on the amount of indebtedness the Company may incur, the Board of Directors of the Company has adopted a current policy limiting the amount of indebtedness that the
Company will incur to an amount not in excess of approximately 45% of the Company's investment in hotel properties, at cost, (as defined). The Board of Directors may change the debt policy at any time
without shareholder approval.

The
Company intends to fund cash distributions to shareholders and limited partners principally out of cash generated from operations. The Company may incur, or cause its subsidiaries to
incur, indebtedness to meet distribution requirements imposed on a REIT under the Internal Revenue Code including the requirement that a REIT distribute to its shareholders annually at least 90% of
its taxable

39

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income to the extent that working capital and cash flow from the Company's investments are insufficient to make such distributions.

In
2003, based on the Company's estimated funds from operations of approximately $37 million, capital expenditures of $11.7 million and dividends of $1.00 per share, the
Company estimates it will need to borrow approximately $6.5 million under the Line of Credit to fund its operations. Among other factors, the risks discussed under "BusinessRisk
Factors" may impact the Company's continued ability to pay dividends at the current rate.

Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the
ability of the lessees and management companies to raise room rates. Despite low inflation in the past few years, room rates have decreased over the last two years. However, there can be no assurance
that inflation will not rise significantly or that the Company will not be able to raise room rates.

Seasonality

The hotels' operations historically have been seasonal in nature, reflecting higher occupancy during the second and third quarters. This seasonality can be
expected to cause fluctuations in the Company's quarterly operating profits. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations
in revenue, the Company expects to utilize cash on hand or borrowings under the line of credit to make distributions to the equity holders.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company believes the following critical accounting
policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.

On
an on-going basis, the Company evaluates its estimates, including those related to bad debts, carrying value of investments in hotels, income taxes, contingencies and
litigation. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.

The
Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The Company monitors on a regular basis
its outstanding receivables and actively seeks to collect all overdue balances by sending overdue notices to customers, speaking with customers, and seeking collection through the use of an agency or
the court of law. If the Company feels that a portion of a receivable or an entire receivable will not be collected, the Company provides an allowance for doubtful accounts against that receivable for
the estimate of the uncollectible amount. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of the customers' ability to make payments, additional
allowances may be required.

The
Company records an impairment charge when it believes an investment in hotel has been impaired such that future undiscounted cash flows would not recover the book basis of the
investment

40

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in hotel. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that
may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future.

The
Company recognizes deferred tax assets to an amount that is more likely than not to be realized. The Company has determined that no valuation allowance is necessary based on its
estimates of future taxable income and ongoing prudent and feasible tax planning strategies. Should the Company determine it would not be likely to realize in full the deferred tax asset in the
future, the Company would record a valuation allowance to reduce the deferred tax asset to an amount that is more likely than not to be realized. Such adjustment to the deferred tax asset would
decrease income in the period such determination was made.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") of the FASB has set forth in EITF Issue No 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also included
(1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 will be effective for exit or disposal
activities initiated after December 31, 2002. We believe that SFAS No. 146 will have no effect on our results of operations and financial position.

The
FASB has issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," which is effective for certain transactions arising on or after October 1, 2002. SFAS
No. 147 will have no impact on the Company.

The
FASB has issued SFAS No. 148 "Accounting for Stock-Based CompensationTransition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure requirements of SFAS No. 148. As of December 31, 2002, the Company
accounts for stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. However, the Company will apply
the fair value based method of accounting for stock-based employee compensation prospectively to all awards granted, modified, or settled beginning January 1, 2003.

FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," ("FIN 45") was issued in November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific

41

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approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective
for financial statements of interim or annual periods ending after December 15, 2002. The Company has made the disclosures required by FIN 45.

FASB
Interpretation No. 46, "Consolidation of Variable Interest Entitiesan interpretation of ARB No. 51," ("FIN 46") was issued in January 2003. FIN 46
requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN 46 applies
immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The
Company has no ownership interest in variable interest entities that would be consolidated under the requirements of FIN 46.

Item 7A.Qualitative and Quantitative Disclosure About Market Risk

The Company is exposed to certain financial market risks, one being fluctuations in interest rates. The Company monitors interest rate fluctuations as an integral
part of the Company's overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the Company's results. The
effect of interest rate fluctuations historically has been small relative to other factors affecting operating results, such as occupancy.

The
Company's operating results are affected by changes in interest rates primarily as a result of borrowing under its Line of Credit. If interest rates increased by 25 basis points,
interest expense would have increased by approximately $23 thousand, based on balances outstanding during the year ended December 31, 2002. If borrowings under the Line of Credit were to
increase materially, the impact of a 25 basis point increase in interest rates could have a more material adverse impact on our interest expense.

The
Company's primary market risk exposure is to changes in interest rates as a result of its Line of Credit and long-term debt. At December 31, 2002, the Company had
outstanding total indebtedness of approximately $291.2 million. The Company's interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to
lower its overall borrowing costs. To achieve this objective, the Company manages its exposure to fluctuations in market interest rates for its borrowings through the use of fixed or variable rate
debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements through derivative financial instruments such as interest rate swaps. The Company does not enter
into derivative or interest rate transactions for speculative purposes. Approximately 98% of the Company's outstanding debt was subject to fixed rates with a weighted average interest rate of 8.7% at
December 31, 2002. On February 26, 2002, the Company terminated its two interest rate swap agreements for approximately $3.2 million. There were no outstanding interest rate swap
agreements at December 31, 2002. The Company regularly reviews interest rate exposure on its outstanding borrowings in an effort to minimize the risk of interest rate fluctuations.

The
following table provides information about the Company's instruments that are sensitive to changes in interest rates. For debt obligations outstanding at December 31, 2002,
the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve as
of December 31, 2002. The fair value of the Company's fixed rate debt indicates the estimated principal amount of debt having similar debt service requirements, which could have been borrowed
by the Company at

42

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December 31, 2002. The rate assumed in the fair value calculation of fixed rate debt is equal to 5.45%, which consists of the 7-year treasury of 2.95% as of December 31,
2002, plus 250 basis points.

Expected Principal Cash Flows

|Liabilities     |                       | 2003 |   | 2004  |   | 2005  |       | 2006 |   | 2007  |   | Thereafter |       | Total |   | Fair
Value
Total
|--------------- | --------------------- | ---- | - | ----- | - | ----- | ----- | ---- | - | ----- | - | ---------- | ----- | ----- | - | ----------------
|
|Long-Term Debt: |                       |      |   |       |   |       |       |      |   |       |   |            |       |       |   |                 
|                | Fixed Rate            |      | $ | 2,695 |   | $     | 2,888 |      | $ | 3,161 |   | $          | 3,424 |       | $ | 19,662          
|                | Average Interest Rate |      |   | 8.73  | % |       | 8.73  | %    |   | 8.73  | % |            | 8.73  | %     |   | 8.73            
|Variable Rate   |                       |      |  |       | $ | 6,950 |       |      |  |       |   |           |       |       |  |                 
|                | Average Interest Rate |      |   | 3.93  | % |       |       |      |   |       |   |            |       |       |   |                 

The table incorporates only those exposures that exist as of December 31, 2002 and does not consider exposures or positions that could
arise after that date. In addition, because firm commitments are not represented in the table above, the information presented therein has limited predictive value. As a result, the Company's ultimate
realized gain or loss with respect to interest rate fluctuations would depend on the exposures that arise during future periods, prevailing interest rates, and the Company's strategies at that time.
There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future
interest rates and the Company's financing requirements.

Item 8.Financial Statements and Supplementary Data

Incorporated herein beginning at page F-1.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

43

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PART III

Item 10.Directors and Executive Officers of the Company

Information about the Directors and Executive Officers of the Company is incorporated herein by reference to the discussion under "Executive Officers of RFS" in
the RFS Proxy Statement for the 2003 Annual Meeting of Shareholders.

Codes of Business Conduct and Ethics

The Company has adopted a Code of Business Conduct and Ethics that applies to all of its employees. In addition, the Company has adopted a Code of Ethics for its
Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer and Chief Accounting Officer which is supplemented by the Code of Business Conduct and Ethics. The Company's
Code of Ethics and Code of Business Conduct and Ethics are posted on its Internet website and can be accessed at www.rfshotel.com. With respect to any amendment to, or a waiver from, any provision of
its Code of Business Conduct and Ethics or its Code of Ethics that applies to the officers noted above and that relates to any standards that are reasonably designed to deter wrongdoing and to
promote:



the
Company intends to post information about such amendment or waiver on its Internet website, atwww.rfshotel.com.

Audit Committee Financial Expert

The Board of Directors approved certain changes to the members of the Audit Committee at its meeting on January 29, 2003. Beginning with the Audit
Committee meeting scheduled for April 29, 2003, the Audit Committee will be comprised of Messrs. H. Lance Forsdick, Michael Starnes and Richard Reiss. Mr. Forsdick, an independent
Director, will be the Chairman of the Audit Committee and its financial expert, as defined by the SEC.

Item 11.Executive Compensation

Information about executive compensation is incorporated herein by reference to the discussion under "Executive Compensation Tables" in the RFS Proxy Statement
for the 2003 Annual Meeting of Shareholders.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stock Matters

The Company's share incentive plan for employees, officers and directors (the "Plan") provides for the grant of stock options to purchase a specified number of
shares of common stock ("Options") and grants of restricted shares of common stock ("Restricted Stock"). Under the Plan, approximately 2.3 million shares of common stock, of which
650 thousand shares may be restricted stock, are available for awards to the officers and key employees of the Company and 675 thousand shares of common

44

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stock, of which 120 thousand shares may be restricted stock, are available for awards to Directors of the Company who are not officers or employees. The Company has no equity compensation
plans not
approved by shareholders. The following sets forth the securities outstanding and available for grant under the Company's share incentive plan:

Securities issued
under equity
compensation plans

Weighted average
price (1)

Number of
securities
available for
future issuance
under plansOptions issued under equity compensation plans approved by shareholders

1,327,998

$
12.25

418,035Restricted stock issued under equity compensation plans approved by shareholders

618,834

$
13.28

151,166Equity compensation plans not approved by shareholdersTotal

1,946,832


Note (1
)
569,201


---

Information
about the security ownership of certain beneficial owners and management of the Company is incorporated herein by reference to the discussion under "Director and Officer
Stock Ownership" and "Principal Stockholders" in the RFS Proxy Statement for the 2003 Annual Meeting of Shareholders.

Item 13.Certain Relationships and Related Transactions

Information about certain relationships and related transactions is incorporated by reference to the discussion under "Certain Relationships and Related
Transactions" in the RFS Proxy Statement for the 2003 Annual Meeting of Shareholders.

Item 14.Controls and Procedures

Within ninety (90) days prior to the filing date of this report, the Company evaluated, under the supervision and with the participation of the Company's
management (including its chief executive officer and chief financial officer), the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14 and 15d-14.

Based
on their evaluation of such disclosure controls and procedures, the Company's chief executive officer and chief financial officer have concluded that such controls were effective
as of March 1, 2003, are operating as designed and will alert them on a timely basis to any material information relating to the Company required to be included in the Company's periodic SEC
filings.

There
have been no significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation, and
no corrective actions with regards to significant deficiencies and material weaknesses (of which none were noted) were required.

45

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PART IV

Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 10-K

(a) Financial Statements

The following financial statements are included in this report on Form 10-K:



Notes
to Consolidated Financial Statements of RFS Hotel Investors, Inc. and RFS Partnership, L.P.

The
following financial statement schedule and report of independent accountants on the financial statement schedule is included in this report on Form 10-K:



All
other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information is included in the
consolidated financial statements and notes thereto.

46

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(b) Reports on Form 8-K

RFS Hotel Investors, Inc.



RFS Partnership, L.P.



47

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(c) Exhibits

|Exhibit
Number |     | Exhibit                                                                                                                                                                                                                                                                                                            
|-------------- | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |     | Second Restated Charter of RFS Hotel Investors, Inc. dated March 6, 1995 (previously filed as Exhibit 3.1 to RFS's Current Report on Form 8-K dated March 6, 1995 and incorporated herein by reference).                                                                                                           
|3.1            | (a) | Articles of Amendment to Second Restated Charter of RFS Hotel Investors, Inc. dated February 27, 1996 (previously filed as Exhibit 3.1 to RFS's Report on Form 8-K dated March 14, 1996 and incorporated herein by
reference).                                                                                     
|3.1            | (b) | Second Articles of Amendment to Second Restated Charter of RFS Hotel Investors, Inc. dated June 27, 1996 (previously filed as Exhibit 3.1 to RFS's Report on Form 8-K dated July 8, 1996 and incorporated herein by
reference).                                                                                    
|3.1            | (c) | Articles of Amendment to the Second Restated Charter of RFS Hotel Investors, Inc. dated December 27, 2000 (previously filed as Exhibit 3.1 to RFS's current report on Form 8-K dated January 16, 2001 and incorporated herein
by reference).                                                                       
|3.1            | (d) | Articles of Amendment to the Second Restated Charter of RFS Hotel Investors, Inc. dated December 13, 2001 (previously filed as Exhibit 3.1(d) to RFS's form S-4 Registration Statement dated March 14, and incorporated
herein by reference).                                                                      
|3.2            |     | By-Laws of RFS Hotel Investors, Inc. (previously filed as Exhibit 3.2 to RFS's form S-11 Registration Statement, Registration No. 33-63696 and incorporated herein by reference).                                                                                                                                  
|3.3            |     | Fifth Amended and Restated Agreement of Limited Partnership of RFS Partnership, L.P. dated January 2, 2001 (previously filed as Exhibit 3.3 to RFS's Form 10-K for the year ended December 31, 2000 and incorporated herein
by reference).                                                                         
|3.4            |     | Charter of RFS 2002 Financing, Inc. dated February 8, 2002. (previously filed as Exhibit 3.5 to RFS's form S-4 Registration Statement dated March 14, 2002, and incorporated herein by reference).                                                                                                                 
|3.5            |     | By-Laws of RFS 2002 Financing, Inc. dated February 8, 2002 (previously filed as Exhibit 3.6 to RFS's form S-4 Registration Statement dated March 14, 2002, and incorporated herein by reference).                                                                                                                  
|3.6            |     | Charter of RFS Leasing VII, Inc. dated November 13, 2000 (previously filed as Exhibit 3.7 to RFS's form S-4 Registration Statement dated March 14, 2002, and incorporated herein by reference).                                                                                                                    
|3.6            | (a) | Articles of Amendment to the Charter of RFS Leasing VII, Inc. dated December 10, 2001 (previously filed as Exhibit 3.7(a) to RFS's form S-4 Registration Statement dated March 14, 2002, and incorporated herein by
reference).                                                                                    
|3.7            |     | By-Laws of RFS Leasing VII, Inc. dated November 13, 2000 (previously filed as Exhibit 3.8 to RFS's form S-4 Registration Statement dated March 14, 2002, and incorporated herein by reference).                                                                                                                    
|**4.1          |     | Indenture dated February 26, 2002 among RFS Partnership, L.P., RFS 2002 Financing, Inc., RFS Leasing VII, Inc., RFS Hotel Investors, Inc. and U.S. Bank National Association (previously filed as Exhibit 4.1 to RFS's form
S-4 Registration Statement dated March 14, 2002, and incorporated herein by reference).
|**4.2          |     | Form of Global Note evidencing the 9.75% Series B Senior Notes due 2012 of RFS Partnership, L.P. and RFS 2002 Financing, Inc. (previously filed as Exhibit A to Exhibit 4.1 to RFS's form S-4 Registration Statement dated
March 14, 2002, and incorporated herein by reference).                                  

48

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|4.3   |     | Form of Guaranty by RFS Hotel Investors, Inc. and RFS Leasing VII, Inc. (previously filed as Exhibit A to Exhibit 4.1 to RFS's form S-4 Registration Statement dated March 14, 2002, and incorporated herein by
reference).                                                                                                                                                    
|----- | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**4.4 |     | Registration Rights Agreement dated February 26, 2002 among RFS Partnership, L.P., RFS 2002 Financing, Inc., RFS Leasing VII, Inc., RFS Hotel Investors, Inc., Credit Suisse First Boston Corporation and Banc of America
Securities LLC (previously filed as Exhibit 4.4 to RFS's form S-4 Registration Statement dated March 14, 2002, and incorporated herein by reference).
|10.1  |     | Consolidated Lease Amendment (previously filed as Exhibit 10.3 to the Company's current report on Form 8-K, dated February 27, 1996 and incorporated herein by reference).                                                                                                                                                                                                     
|10.2  |     | Form of Future Percentage Lease (previously filed as Exhibit 10.4 to the Company's Current Report on Form 8-K, dated February 27, 1996 and incorporated herein by reference).                                                                                                                                                                                                  
|10.2  | (a) | Schedule of terms of Percentage Leases (previously filed as Exhibit 10.2(a) to the Company's Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).                                                                                                                                                                                             
|10.2  | (b) | Form of Percentage Lease with TRS Lessees (previously filed as Exhibit 10.1 to the Company's Current report on Form 8-K dated January 16, 2001 and incorporated herein by reference).                                                                                                                                                                                          
|10.2  | (c) | Form of Management Agreement with Flagstone (previously filed as Exhibit 10.2 to the Company's current report Form 8-K dated January 16, 2001 and incorporated herein by reference).                                                                                                                                                                                           
|10.4  |     | Second Amended and Restated Employment Agreement between RFS Managers, Inc. and Robert M. Solmson (previously filed as Exhibit 10.4 to the Company's Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).                                                                                                                                     
|10.4  | (a) | Employment Agreement between RFS Managers, Inc. and Randall L. Churchey dated September 27, 1999 (previously filed as Exhibit 10.4(a) to the Company's Form 10-K for the year ended December 31,
2000 and incorporated herein by reference).                                                                                                                                   
|10.4  | (b) | Employment Agreement between RFS Managers, Inc. and Kevin M. Luebbers dated July 1, 2000 (previously filed as Exhibit 10.4(b) to the Company's Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).                                                                                                                                           
|10.9  |     | Master Agreement, dated February 1, 1996 (previously filed as Exhibit 10.2 to the Company's current Report on Form 8-K dated February 27, 1996 and incorporated herein by reference).                                                                                                                                                                                          
|10.9  | (a) | First Amendment to Master agreement dated as of November 21, 1996 (previously filed as Exhibit 10.9(a) to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein by
reference).                                                                                                                                                                  
|10.10 |     | Indenture dated as of November 21, 1996 (previously filed as Exhibit 10.10 to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).                                                                                                                                                                                              
|10.15 |     | Termination Agreement dated as of January 26, 2000 (previously filed as Exhibit 10.15 to the Company's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).                                                                                                                                                                                   

49

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|10.16    |  | First Amendment to the Fourth Amended and Restated Revolving Credit Agreement dated March 1, 2000 (previously filed as Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).                                                                                 
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17    |  | Second Amendment to the Fourth Amended and Restated Revolving Credit Agreement dated August 1, 2000 (previously filed as Exhibit 10.17 to the Company's Form 10-K for the year ended December 31, 2000
and incorporated herein by reference).                                                                               
|10.18    |  | Third Amendment to the Fourth Amended and Restated Revolving Credit Agreement dated August 1, 2000 (previously filed as Exhibit 10.18 to the Company's Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).                                                                                
|10.19    |  | Loan Agreement dated August 9, 2000 by and between Bank of America, N.A. (as lender) and RFS SPE 2000 LLC (as borrower), a wholly-owned subsidiary of RFS Hotel Investors, Inc. (previously filed as
Exhibit 10.19 to the Company's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.)   
|10.20    |  | Loan Agreement dated August 9, 2000 by and between Bank of America, N.A. (as lender) and RFS SPE 2 2000, LLC (as borrower), a wholly-owned subsidiary of RFS Hotel Investors, Inc. (previously filed as
Exhibit 10.20 to the Company's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.)
|**10.21  |  | Sixth Amended and Restated Revolving Credit Agreement dated October 31, 2002 (previously filed as Exhibit 10.1 to the Company's current Report on Form 8-K dated January 13, 2003 and incorporated herein
by reference).                                                                                                    
|* **12.1 |  | Statement regarding Computation of Ratios of RFS Hotel Investors, Inc and RFS Partnership, L.P.                                                                                                                                                                                                                             
|21.1     |  | List of Subsidiaries of the Registrant (previously filed as Exhibit 21.1 to the RFS's form S-4 Registration statement dated March 14, 2002, and incorporated herein by reference).                                                                                                                                          
|* **23.1 |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                      

---

50

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on
their behalf by the undersigned, thereunto duly authorized.

|                     |  | RFS HOTEL INVESTORS, INC., on RFS' own behalf and as the sole General Partner of RFS PARTNERSHIP, L.P.
|-------------------- |  | ------------------------------------------------------------------------------------------------------
|                     |  | By:                                                                                                   
|Date: March 19, 2003 |  |                                                                                                       

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 registrants and
in the capacities of RFS, and as General Partner on behalf of the Operation Partnership, and on the dates indicated:

|SIGNATURE                                       |  | TITLE                                                                              |  | DATE          
|----------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | --------------
|                                                |  |                                                                                    |  |               
|/s/ROBERT M. SOLMSONRobert M. Solmson           |  | Chairman of the Board and Chief Executive Officer and Director                     |  | March 19, 2003
|/s/RANDALL L. CHURCHEYRandall L. Churchey       |  | President and Chief Operating Officer and Director                                 |  | March 19, 2003
|/s/KEVIN M. LUEBBERSKevin M. Luebbers           |  | Executive Vice President and Chief Financial Officer (principal financial officer) |  | March 19, 2003
|/s/DENNIS M. CRAVENDennis M. Craven             |  | Vice President and Chief Accounting Officer (principal accounting officer)         |  | March 19, 2003
|/s/H. LANCE FORSDICKH. Lance Forsdick, Sr.      |  | Director                                                                           |  | March 19, 2003
|/s/BRUCE E. CAMPBELL, JR.Bruce E. Campbell, Jr. |  | Director                                                                           |  | March 19, 2003
|/s/MICHAEL S. STARNESMichael S. Starnes         |  | Director                                                                           |  | March 19, 2003
|/s/JOHN W. STOKES, JR.John W. Stokes, Jr.       |  | Director                                                                           |  | March 19, 2003
|/s/R. LEE JENKINSR. Lee Jenkins                 |  | Director                                                                           |  | March 19, 2003
|                                                |  |                                                                                    |  |               

51

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|/s/RICHARD REISS, JR.Richard Reiss, Jr. |  | Director |  | March 19, 2003
|--------------------------------------- |  | -------- |  | --------------
|/s/KARL MATTHIESKarl Matthies           |  | Director |  | March 19, 2003

52

---



CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I,
Robert M. Solmson, certify that:



|Date: March 19, 2003 |  | /s/ROBERT M. SOLMSONRobert M. Solmson Chairman of the Board and Chief
Executive Officer
|-------------------- |  | ---------------------------------------------------------------------------------------

53

---

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I,
Kevin M. Luebbers, certify that:



|Date: March 19, 2003 |  | /s/KEVIN M. LUEBBERSKevin M. Luebbers Executive Vice President and Chief
Financial Officer
|-------------------- |  | ------------------------------------------------------------------------------------------

54

---



REPORT OF INDEPENDENT ACCOUNTANTS

To
the Board of Directors and
Shareholders of RFS Hotel Investors, Inc.

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income (loss), of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of RFS Hotel Investors, Inc. ("RFS") at December 31, 2002 and 2001, and the results of its operations and cash
flows for the three years then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of RFS' 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 auditing standards generally accepted in
the United States of America 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 our opinion.

As
discussed in Note 2 to the consolidated financial statements, effective January 1, 2001, RFS adopted the provisions of FASB No. 133, "Accounting for Derivative
Instruments and Hedging Activities;" and as discussed in Note 8 and Note 2 to the consolidated financial statements, effective January 1, 2002, RFS adopted FASB No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets," and FASB No. 145, "Rescission of FAS Statements No. 4, 44 and 64, Amendment of FASB No. 13, and Technical
Corrections."

PricewaterhouseCoopers
LLP

Dallas,
Texas
January 29, 2003, except for Note 13, as to
which the date is March 3, 2003

F-1

---



RFS HOTEL INVESTORS, INC.  CONSOLIDATED BALANCE SHEETS  (in thousands)

|                                                                                                                                                                            |                                                                                                                                                   | December 31, 2002          |                                            | December 31, 2001 |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ----------------- | -------
|ASSETS                                                                                                                                                                      |                                                                                                                                                  
|Investment in hotel properties, net                                                                                                                                         |                                                                                                                                                   | $                          | 593,289                                    |                   | $      
|Cash and cash equivalents                                                                                                                                                   |                                                                                                                                                   |                            | 1,938                                      |                   |        
|Restricted cash                                                                                                                                                             |                                                                                                                                                   |                            | 4,383                                      |                   |        
|Accounts receivable                                                                                                                                                         |                                                                                                                                                   |                            | 4,698                                      |                   |        
|Deferred expenses, net                                                                                                                                                      |                                                                                                                                                   |                            | 8,805                                      |                   |        
|Other assets                                                                                                                                                                |                                                                                                                                                   |                            | 3,712                                      |                   |        
|Deferred income taxes                                                                                                                                                       |                                                                                                                                                   |                            | 25,830                                     |                   |        
|                                                                                                                                                                            |                                                                                                                                                   |                            |                                            |                   |        
|                                                                                                                                                                            |                                                                                                                                                   | Total assets               |                                            | $                 | 642,655
|                                                                                                                                                                            |                                                                                                                                                   |                            |                                            |                   |        
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                        |                                                                                                                                                  
|Accounts payable and accrued expenses                                                                                                                                       |                                                                                                                                                   | $                          | 22,160                                     |                   | $      
|Borrowings on Line of Credit                                                                                                                                                |                                                                                                                                                   |                            | 6,950                                      |                   |        
|Mortgage notes payable                                                                                                                                                      |                                                                                                                                                   |                            | 159,279                                    |                   |        
|Senior notes payable                                                                                                                                                        |                                                                                                                                                   |                            | 125,000                                    |                   |        
|Minority interest in Operating Partnership, 2,459 units issued and outstanding at December 31, 2002 and December 31, 2001, respectively and other consolidated subsidiaries |                                                                                                                                                   |                            | 28,047                                     |                   |        
|                                                                                                                                                                            |                                                                                                                                                   |                            |                                            |                   |        
|                                                                                                                                                                            |                                                                                                                                                   | Total liabilities          |                                            |                   | 341,436
|                                                                                                                                                                            |                                                                                                                                                   |                            |                                            |                   |        
|Series B Preferred Stock, $0.01 par value, 5,000 shares authorized, 250 shares issued and outstanding at December 31, 2001                                                  |                                                                                                                                                   |                            |                                            |                   |        
|                                                                                                                                                                            |                                                                                                                                                   |                            |                                            |                   |        
|Commitments and contingencies                                                                                                                                               |                                                                                                                                                   |                            |                                            |                   |        
|Shareholders' equity:                                                                                                                                                       |                                                                                                                                                   |                            |                                            |                   |        
|                                                                                                                                                                            | Common Stock, $.01 par value, 100,000 shares authorized, 29,043 and 25,811 shares issued at December 31, 2002 and December 31, 2001, respectively |                            |                                            | 290               |        
|                                                                                                                                                                            | Additional paid-in capital                                                                                                                        |                            |                                            | 408,017           |        
|                                                                                                                                                                            | Other comprehensive income                                                                                                                        |                            |                                            |                   |        
|                                                                                                                                                                            | Treasury stock, at cost, 576 shares                                                                                                               |                            |                                            | (8,100            | )      
|                                                                                                                                                                            | Distributions in excess of earnings                                                                                                               |                            |                                            | (98,988           | )      
|                                                                                                                                                                            |                                                                                                                                                   |                            |                                            |                   |        
|                                                                                                                                                                            |                                                                                                                                                   | Total shareholders' equity |                                            |                   | 301,219
|                                                                                                                                                                            |                                                                                                                                                   |                            |                                            |                   |        
|                                                                                                                                                                            |                                                                                                                                                   |                            | Total liabilities and shareholders' equity |                   | $      
|                                                                                                                                                                            |                                                                                                                                                   |                            |                                            |                   |        

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

F-2

---

RFS HOTEL INVESTORS, INC.  CONSOLIDATED STATEMENTS OF OPERATIONS  For the Years Ended December 31, 2002, 2001 and 2000  (in thousands, except per share data)

|                                                                                   |                                                          | 2002                     |        | 2001    |         | 2000    |        
|---------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ------ | ------- | ------- | ------- | -------
|Revenue:                                                                           |                                                          |                          |        |         |         |         |        
|                                                                                   | Rooms                                                    |                          | $      | 169,357 |         | $       | 187,144
|                                                                                   | Food and beverage                                        |                          |        | 17,452  |         |         | 17,695 
|                                                                                   | Other operating departments                              |                          |        | 6,449   |         |         | 9,044  
|                                                                                   | Lease revenue                                            |                          |        | 5,229   |         |         | 5,782  
|                                                                                   | Other                                                    |                          |        | 411     |         |         | 573    
|                                                                                   |                                                          |                          |        |         |         |         |        
|                                                                                   |                                                          | Total hotel revenue      |        |         | 198,898 |         |        
|                                                                                   |                                                          |                          |        |         |         |         |        
|Hotel operating expenses:                                                          |                                                          |                          |        |         |         |         |        
|                                                                                   | Rooms                                                    |                          |        | 34,679  |         |         | 36,617 
|                                                                                   | Food and beverage                                        |                          |        | 12,793  |         |         | 13,533 
|                                                                                   | Other operating departments                              |                          |        | 1,874   |         |         | 2,163  
|Undistributed operating expenses:                                                  |                                                          |                          |        |         |         |         |        
|                                                                                   | Property operating costs                                 |                          |        | 21,798  |         |         | 22,193 
|                                                                                   | Property taxes, insurance and other                      |                          |        | 12,536  |         |         | 12,767 
|                                                                                   | Franchise costs                                          |                          |        | 16,265  |         |         | 16,857 
|                                                                                   | Maintenance and repair                                   |                          |        | 9,485   |         |         | 9,576  
|                                                                                   | Management fees                                          |                          |        | 4,876   |         |         | 5,721  
|                                                                                   | Depreciation                                             |                          |        | 29,812  |         |         | 29,290 
|                                                                                   | Lease termination                                        |                          |        |         |         |         | 65,489 
|                                                                                   | Amortization of franchise fees and unearned compensation |                          |        | 1,247   |         |         | 1,384  
|                                                                                   | General and administrative                               |                          |        | 19,079  |         |         | 19,246 
|                                                                                   |                                                          |                          |        |         |         |         |        
|                                                                                   |                                                          | Total operating expenses |        |         | 164,444 |         |        
|                                                                                   |                                                          |                          |        |         |         |         |        
|Operating income (loss)                                                            |                                                          |                          | 34,454 |         |         | (14,598 | )      
|                                                                                   | Debt extinguishments and swap termination costs          |                          |        | 10,122  |         |         |        
|                                                                                   | Amortization of loan origination costs                   |                          |        | 1,617   |         |         | 1,354  
|                                                                                   | Interest expense                                         |                          |        | 25,484  |         |         | 24,688 
|                                                                                   |                                                          |                          |        |         |         |         |        
|Income (loss) from continuing operations before minority interest and income taxes |                                                          |                          | (2,769 | )       |         | (40,640 | )      
|                                                                                   | Minority interest                                        |                          |        | (654    | )       |         | (1,150 
|                                                                                   | Benefit from income taxes                                |                          |        | (1,096  | )       |         | (24,714
|                                                                                   |                                                          |                          |        |         |         |         |        
|Income (loss) from continuing operations                                           |                                                          |                          | (1,019 | )       |         | (14,776 | )      
|Earnings (losses) from discontinued operations                                     |                                                          |                          | (3,719 | )       |         | (80     | )      
|Gain (loss) on sale of assets                                                      |                                                          |                          | 950    |         |         | 1,127   |        
|                                                                                   |                                                          |                          |        |         |         |         |        
|Net income (loss)                                                                  |                                                          |                          | (3,788 | )       |         | (13,729 | )      
|                                                                                   | Gain (loss) on redemption of preferred Stock             |                          |        | (1,890  | )       |         | 5,141  
|                                                                                   | Preferred stock dividends                                |                          |        | (1,562  | )       |         | (3,125 
|                                                                                   |                                                          |                          |        |         |         |         |        
|Net income (loss) applicable to common shareholders                                |                                                          | $                        | (7,240 | )       | $       | (11,713 | )      
|                                                                                   |                                                          |                          |        |         |         |         |        
|Earnings (loss) per share data:                                                    |                                                          |                          |        |         |         |         |        
|Basic earnings (loss) per share from continuing operations                         |                                                          | $                        | (0.12  | )       | $       | (0.47   | )      
|                                                                                   | Discontinued operations                                  |                          |        | (0.14   | )       |         | 0.00   
|                                                                                   |                                                          |                          |        |         |         |         |        
|                                                                                   | Basic earnings (loss) per share                          |                          | $      | (0.26   | )       | $       | (0.47  
|                                                                                   |                                                          |                          |        |         |         |         |        
|Diluted earnings (loss) per share from continuing operations                       |                                                          | $                        | (0.12  | )       | $       | (0.47   | )      
|                                                                                   | Discontinued operations                                  |                          |        | (0.14   | )       |         | 0.00   
|                                                                                   |                                                          |                          |        |         |         |         |        
|                                                                                   | Diluted earnings (loss) per share                        |                          | $      | (0.26   | )       | $       | (0.47  
|                                                                                   |                                                          |                          |        |         |         |         |        
|Weighted average common shares outstandingbasic                                   |                                                          |                          | 27,446 |         |         | 25,045  |        
|Weighted average common shares outstandingdiluted                                 |                                                          |                          | 27,446 |         |         | 25,045  |        

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

F-3

---



RFS HOTEL INVESTORS, INC.  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  For the Years Ended December 31, 2002, 2001 and 2000  (in thousands)

|                                                            |  | 2002 |        | 2001 |   | 2000   
|----------------------------------------------------------- |  | ---- | ------ | ---- | - | -------
|Net income (loss)                                           |  | $    | (3,788 | )    | $ | (13,729
|Reclassification adjustment for losses included in earnings |  |      | 3,220  |      |   |        
|Unrealized holding loss on interest rate swaps              |  |      |        |      |   | (3,220 
|                                                            |  |      |        |      |   |        
|Comprehensive income (loss)                                 |  | $    | (568   | )    | $ | (16,949
|                                                            |  |      |        |      |   |        

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

F-4

---

RFS HOTEL INVESTORS, INC.  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY  For the Years Ended December 31, 2002, 2001 and 2000  (in thousands, except per share data)

|                                                                                             |  |   |     | Common Stock |        |  |   |     |  |   |         |   |   |        |  
|-------------------------------------------------------------------------------------------- |  | - | --- | ------------ | ------ |  | - | --- |  | - | ------- | - | - | ------ | -
|
|Balances at December 31, 1999                                                                |  | $ | 10  |              | 25,062 |  | $ | 251 |  | $ | 374,087 |   |   |        |  
|Purchase of treasury shares                                                                  |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Issuance of common shares                                                                    |  |   |     |              | 26     |  |   |     |  |   | 162     |   |   |        |  
|Distributions on common shares, ($1.54 per share)                                            |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Distributions on Series A preferred shares, ($1.54 per share)                                |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Amortization of unearned compensation                                                        |  |   |     |              |        |  |   |     |  |   | 661     |   |   |        |  
|Net income                                                                                   |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|                                                                                             |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Balances at December 31, 2000                                                                |  | $ | 10  |              | 25,088 |  | $ | 251 |  | $ | 374,910 |   |   |        |  
|Redemption of Series A preferred shares, including $5,141 gain on redemption                 |  |   | (10 | )            |        |  |   |     |  |   | (12,990 | ) |   |        |  
|Series B Preferred Shares issuance costs                                                     |  |   |     |              |        |  |   |     |  |   | (1,040  | ) |   |        |  
|Issuance of common shares                                                                    |  |   |     |              | 723    |  |   | 7   |  |   | 6,152   |   |   |        |  
|Distributions on common shares, ($1.255 per share)                                           |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Distributions on preferred shares, ($0.385 per Series A share and $12.50 per Series B share) |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Unrealized holding losses arising on interest rate swaps                                     |  |   |     |              |        |  |   |     |  |   |         |   | $ | (3,220 | )
|Amortization of unearned compensation                                                        |  |   |     |              |        |  |   |     |  |   | 1,329   |   |   |        |  
|Net loss                                                                                     |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|                                                                                             |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Balances at December 31, 2001                                                                |  | $ | 0   |              | 25,811 |  | $ | 258 |  | $ | 368,361 |   | $ | (3,220 | )
|Loss on redemption of Series B preferred shares, net of $1,040 issuance costs                |  |   |     |              |        |  |   |     |  |   | (850    | ) |   |        |  
|Issuance of common shares                                                                    |  |   |     |              | 3,232  |  |   | 32  |  |   | 39,621  |   |   |        |  
|Allocation to minority interest                                                              |  |   |     |              |        |  |   |     |  |   | (232    | ) |   |        |  
|Distributions on common shares, ($1.00 per share)                                            |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Distributions on preferred shares, ($6.25 per Series B share)                                |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Reclassification adjustment for losses included in earnings                                  |  |   |     |              |        |  |   |     |  |   |         |   |   | 3,220  |  
|Amortization of unearned compensation                                                        |  |   |     |              |        |  |   |     |  |   | 1,117   |   |   |        |  
|Net loss                                                                                     |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|                                                                                             |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Balances at December 31, 2002                                                                |  | $ | 0   |              | 29,043 |  | $ | 290 |  | $ | 408,017 |   | $ | 0      |  
|                                                                                             |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  

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

F-5

---



RFS HOTEL INVESTORS, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS  For the Years Ended December 31, 2002, 2001 and 2000  (in thousands)

|                                                     |                                                                                          | 2002                                                                             |                                                  | 2001    |        | 2000    |        
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------ | ------- | ------ | ------- | -------
|Cash flows from operating activities:                |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     | Net income (loss)                                                                        |                                                                                  | $                                                | (3,788  | )      | $       | (13,729
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                                  |                                                  |         |        |         |        
|                                                     |                                                                                          | Depreciation and amortization                                                    |                                                  |         | 32,944 |         |        
|                                                     |                                                                                          | Minority interest in Operating Partnership                                       |                                                  |         | (644   | )       |        
|                                                     |                                                                                          | (Gain) loss on sale of assets, including loss on sale of discontinued operations |                                                  |         | 2,890  |         |        
|                                                     |                                                                                          | Write-off of loan costs                                                          |                                                  |         | 1,361  |         |        
|                                                     |                                                                                          | Changes in assets and liabilities:                                               |                                                  |         |        |         |        
|                                                     |                                                                                          |                                                                                  | Accounts receivable                              |         |        | 835     |        
|                                                     |                                                                                          |                                                                                  | Other assets                                     |         |        | (499    | )      
|                                                     |                                                                                          |                                                                                  | Deferred income taxes                            |         |        | (1,096  | )      
|                                                     |                                                                                          |                                                                                  | Accounts payable and accrued expenses            |         |        | 4,523   |        
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     |                                                                                          |                                                                                  | Net cash provided by operating activities        |         |        | 36,526  |        
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Cash flows from investing activities:                |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     | Investment in hotel properties and hotels under development                              |                                                                                  |                                                  | (14,576 | )      |         | (18,013
|                                                     | Cash paid for franchise fees                                                             |                                                                                  |                                                  | (172    | )      |         | (65    
|                                                     | Restricted cash                                                                          |                                                                                  |                                                  | 2,434   |        |         | (1,888 
|                                                     | Proceeds from sale of hotel properties                                                   |                                                                                  |                                                  | 4,175   |        |         | 11,324 
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     |                                                                                          |                                                                                  | Net cash used by investing activities            |         |        | (8,139  | )      
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Cash flows from financing activities:                |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     | Purchase of treasury stock                                                               |                                                                                  |                                                  |         |        |         |        
|                                                     | Net proceeds (payments) on line of credit                                                |                                                                                  |                                                  | (74,238 | )      |         | 30,914 
|                                                     | Proceeds from issuance of debt                                                           |                                                                                  |                                                  | 125,000 |        |         |        
|                                                     | Payments on mortgage notes payable                                                       |                                                                                  |                                                  | (60,668 | )      |         | (7,210 
|                                                     | Redemption of preferred stock                                                            |                                                                                  |                                                  | (25,850 | )      |         | (13,000
|                                                     | Distributions to common and preferred shareholders                                       |                                                                                  |                                                  | (28,712 | )      |         | (34,142
|                                                     | Distributions to limited partners                                                        |                                                                                  |                                                  | (2,592  | )      |         | (3,135 
|                                                     | Issuance of common stock, net of $0.3 million issuance costs in 2002                     |                                                                                  |                                                  | 39,653  |        |         | 4,479  
|                                                     | Issuance of preferred stock, net of $1.0 million issuance costs                          |                                                                                  |                                                  |         |        |         | 23,960 
|                                                     | Loan fees paid                                                                           |                                                                                  |                                                  | (4,777  | )      |         | (1,636 
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     |                                                                                          |                                                                                  | Net cash provided (used) by financing activities |         |        | (32,184 | )      
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                          |                                                                                  | (3,797                                           | )       |        | 2,054   |        
|Cash and cash equivalents at beginning of period     |                                                                                          |                                                                                  | 5,735                                            |         |        | 3,681   |        
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Cash and cash equivalents at end of period           |                                                                                          | $                                                                                | 1,938                                            |         | $      | 5,735   |        
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Supplemental disclosure of cash flow information:    |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     | Cash paid for interest                                                                   |                                                                                  | $                                                | 22,059  |        | $       | 24,403 

Supplemental
disclosure of non-cash activities: See Note 10 to the consolidated financial statements

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

F-6

---



REPORT OF INDEPENDENT ACCOUNTANTS

To
the Board of Directors
of RFS Hotel Investors, Inc.

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income (loss), of partners' capital and of cash flows
present fairly, in all material respects, the financial position of RFS Partnership, L.P. (the "Partnership") at December 31, 2002 and 2001, and the results of its operations and cash flows for
the three years then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership'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 auditing standards generally
accepted in the United States of America 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 our opinion.

As
discussed in Note 2 to the consolidated financial statements, effective January 1, 2001, the Partnership adopted the provisions of FASB No. 133, "Accounting for
Derivative Instruments and Hedging Activities;" and as discussed in Note 8 and Note 2 to the consolidated financial statements, effective January 1, 2002, the Partnership adopted
FASB No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets" and FASB No. 145, "Rescission of FAS Statements No. 4, 44 and 64, Amendment of FASB No. 13,
and Technical Corrections."

PricewaterhouseCoopers
LLP

Dallas,
Texas
January 29, 2003, except for Note 13, as to
which the date is March 3, 2003

F-7

---



RFS PARTNERSHIP, L.P.  CONSOLIDATED BALANCE SHEETS  (in thousands)

|                                                                                                                         |                         | December 31, 2002                       |         | December 31, 2001 |        
|------------------------------------------------------------------------------------------------------------------------ | ----------------------- | --------------------------------------- | ------- | ----------------- | -------
|ASSETS                                                                                                                   |                        
|Investment in hotel properties, net                                                                                      |                         | $                                       | 593,289 |                   | $      
|Cash and cash equivalents                                                                                                |                         |                                         | 1,938   |                   |        
|Restricted cash                                                                                                          |                         |                                         | 4,383   |                   |        
|Accounts receivable                                                                                                      |                         |                                         | 4,698   |                   |        
|Deferred expenses, net                                                                                                   |                         |                                         | 8,805   |                   |        
|Other assets                                                                                                             |                         |                                         | 3,712   |                   |        
|Deferred income taxes                                                                                                    |                         |                                         | 25,830  |                   |        
|                                                                                                                         |                         |                                         |         |                   |        
|                                                                                                                         | Total assets            |                                         | $       | 642,655           |        
|                                                                                                                         |                         |                                         |         |                   |        
|LIABILITIES AND PARTNERS' CAPITAL                                                                                        |                        
|Accounts payable and accrued expenses                                                                                    |                         | $                                       | 24,202  |                   | $      
|Borrowings on Line of Credit                                                                                             |                         |                                         | 6,950   |                   |        
|Mortgage notes payable                                                                                                   |                         |                                         | 159,279 |                   |        
|Senior notes payable                                                                                                     |                         |                                         | 125,000 |                   |        
|                                                                                                                         |                         |                                         |         |                   |        
|                                                                                                                         | Total liabilities       |                                         |         | 315,431           |        
|                                                                                                                         |                         |                                         |         |                   |        
|Commitments and contingencies                                                                                            |                         |                                         |         |                   |        
|Series B Preferred Units, $0.01 par value, 5,000 units authorized, 250 units issued and outstanding at December 31, 2001 |                         |                                         |         |                   |        
|                                                                                                                         |                         |                                         |         |                   |        
|Redeemable limited partnership units at redemption value, 2,459 units at December 31, 2002 and 2001, respectively        |                         |                                         | 26,702  |                   |        
|                                                                                                                         |                         |                                         |         |                   |        
|Partners' Capital:                                                                                                       |                         |                                         |         |                   |        
|Other comprehensive income                                                                                               |                         |                                         |         |                   |        
|General partnership units, 28,467 units and 25,235 units at December 31, 2002 and December 31, 2001, respectively        |                         |                                         | 300,522 |                   |        
|                                                                                                                         |                         |                                         |         |                   |        
|                                                                                                                         | Total partners' capital |                                         |         | 300,522           |        
|                                                                                                                         |                         |                                         |         |                   |        
|                                                                                                                         |                         | Total liabilities and partners' capital |         | $                 | 642,655
|                                                                                                                         |                         |                                         |         |                   |        

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

F-8

---

RFS PARTNERSHIP, L.P.  CONSOLIDATED STATEMENTS OF OPERATIONS  For the Years Ended December 31, 2002, 2001 and 2000  (in thousands, except per unit data)

|                                                             |                                                          | 2002                     |        | 2001    |         | 2000    |        
|------------------------------------------------------------ | -------------------------------------------------------- | ------------------------ | ------ | ------- | ------- | ------- | -------
|Revenue:                                                     |                                                          |                          |        |         |         |         |        
|                                                             | Rooms                                                    |                          | $      | 169,357 |         | $       | 187,144
|                                                             | Food and beverage                                        |                          |        | 17,452  |         |         | 17,695 
|                                                             | Other operating departments                              |                          |        | 6,449   |         |         | 9,044  
|                                                             | Lease revenue                                            |                          |        | 5,229   |         |         | 5,782  
|                                                             | Other                                                    |                          |        | 411     |         |         | 573    
|                                                             |                                                          |                          |        |         |         |         |        
|                                                             |                                                          | Total hotel revenue      |        |         | 198,898 |         |        
|                                                             |                                                          |                          |        |         |         |         |        
|Hotel operating expenses:                                    |                                                          |                          |        |         |         |         |        
|                                                             | Rooms                                                    |                          |        | 34,679  |         |         | 36,617 
|                                                             | Food and beverage                                        |                          |        | 12,793  |         |         | 13,533 
|                                                             | Other operating departments                              |                          |        | 1,874   |         |         | 2,163  
|Undistributed operating expenses:                            |                                                          |                          |        |         |         |         |        
|                                                             | Property operating costs                                 |                          |        | 21,798  |         |         | 22,193 
|                                                             | Property taxes, insurance and other                      |                          |        | 12,536  |         |         | 12,767 
|                                                             | Franchise costs                                          |                          |        | 16,265  |         |         | 16,857 
|                                                             | Maintenance and repair                                   |                          |        | 9,485   |         |         | 9,576  
|                                                             | Management fees                                          |                          |        | 4,876   |         |         | 5,721  
|                                                             | Depreciation                                             |                          |        | 29,812  |         |         | 29,290 
|                                                             | Lease termination                                        |                          |        |         |         |         | 65,489 
|                                                             | Amortization of franchise fees and unearned compensation |                          |        | 1,247   |         |         | 1,384  
|                                                             | General and administrative                               |                          |        | 19,079  |         |         | 19,246 
|                                                             |                                                          |                          |        |         |         |         |        
|                                                             |                                                          | Total operating expenses |        |         | 164,444 |         |        
|                                                             |                                                          |                          |        |         |         |         |        
|Operating income (loss)                                      |                                                          |                          | 34,454 |         |         | (14,598 | )      
|                                                             | Debt extinguishment and swap termination costs           |                          |        | 10,122  |         |         |        
|                                                             | Amortization of loan origination costs                   |                          |        | 1,617   |         |         | 1,354  
|                                                             | Interest expense                                         |                          |        | 25,484  |         |         | 24,688 
|                                                             |                                                          |                          |        |         |         |         |        
|Income (loss) from continuing operations before income taxes |                                                          |                          | (2,769 | )       |         | (40,640 | )      
|                                                             | Benefit from income taxes                                |                          |        | (1,096  | )       |         | (24,714
|                                                             |                                                          |                          |        |         |         |         |        
|Income (loss) from continuing operations                     |                                                          |                          | (1,673 | )       |         | (15,926 | )      
|Earnings (losses) from discontinued operations               |                                                          |                          | (3,709 | )       |         | (87     | )      
|Gain (loss) on sale of assets                                |                                                          |                          | 950    |         |         | 1,127   |        
|                                                             |                                                          |                          |        |         |         |         |        
|Net income (loss)                                            |                                                          |                          | (4,432 | )       |         | (14,886 | )      
|                                                             | Gain (loss) on redemption of preferred units             |                          |        | (1,890  | )       |         | 5,141  
|                                                             | Preferred unit dividends                                 |                          |        | (1,562  | )       |         | (3,125 
|                                                             |                                                          |                          |        |         |         |         |        
|Net income (loss) applicable to unitholders                  |                                                          | $                        | (7,884 | )       | $       | (12,870 | )      
|                                                             |                                                          |                          |        |         |         |         |        
|Net income (loss) allocated to general partnership units     |                                                          | $                        | (7,240 | )       | $       | (11,713 | )      
|                                                             |                                                          |                          |        |         |         |         |        
|Net income (loss) allocated to limited partnership units     |                                                          | $                        | (644   | )       | $       | (1,157  | )      
|                                                             |                                                          |                          |        |         |         |         |        
|Earnings (loss) per share data:                              |                                                          |                          |        |         |         |         |        
|Basic earnings (loss) per share from continuing operations   |                                                          | $                        | (0.12  | )       | $       | (0.47   | )      
|                                                             | Discontinued operations                                  |                          |        | (0.14   | )       |         | 0.00   
|                                                             |                                                          |                          |        |         |         |         |        
|                                                             | Basic earnings (loss) per share                          |                          | $      | (0.26   | )       | $       | (0.47  
|                                                             |                                                          |                          |        |         |         |         |        
|Diluted earnings (loss) per share from continuing operations |                                                          | $                        | (0.12  | )       | $       | (0.47   | )      
|                                                             | Discontinued operations                                  |                          |        | (0.14   | )       |         | 0.00   
|                                                             |                                                          |                          |        |         |         |         |        
|                                                             | Diluted earnings (loss) per share                        |                          | $      | (0.26   | )       | $       | (0.47  
|                                                             |                                                          |                          |        |         |         |         |        
|Weighted average common units outstandingbasic              |                                                          |                          | 29,905 |         |         | 27,520  |        
|Weighted average common units outstandingdiluted            |                                                          |                          | 29,905 |         |         | 27,520  |        

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

F-9

---



RFS PARTNERSHIP, L.P.  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  For the Years Ended December 31, 2002, 2001 and 2000  (in thousands)

|                                                            |  | 2002 |        | 2001 |   | 2000   
|----------------------------------------------------------- |  | ---- | ------ | ---- | - | -------
|Net income (loss)                                           |  | $    | (4,432 | )    | $ | (14,886
|Reclassification adjustment for losses included in earnings |  |      | 3,220  |      |   |        
|Unrealized holding loss on interest rate swaps              |  |      |        |      |   | (3,220 
|                                                            |  |      |        |      |   |        
|Comprehensive income (loss)                                 |  | $    | (1,212 | )    | $ | (18,106
|                                                            |  |      |        |      |   |        

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

F-10

---

RFS PARTNERSHIP, L.P.  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL  For the Years Ended December 31, 2002, 2001 and 2000  (in thousands)

|Balance, December 31, 1999                                                                                |  |   | 369,947 |  
|--------------------------------------------------------------------------------------------------------- |  | - | ------- | -
|Contributions                                                                                             |  |   | 162     |  
|Redemption of general partnership units                                                                   |  |   | (4,444  | )
|Distributions to general partnership units ($1.54 per unit)                                               |  |   | (38,585 | )
|Distributions to redeemable limited partnership units ($1.54 per unit)                                    |  |   | (3,988  | )
|Distributions preferred units ($1.54 per unit)                                                            |  |   | (1,412  | )
|Allocation to redeemable limited partnership units                                                        |  |   | (6,682  | )
|Contribution from general partner related to amortization of stock-based compensation                     |  |   | 661     |  
|Net income                                                                                                |  |   | 34,008  |  
|                                                                                                          |  |   |        
|Balance, December 31, 2000                                                                                |  |   | 349,667 |  
|Issuance of general partnership units                                                                     |  |   | 4,661   |  
|Redemption of Series A Preferred units, including $5,141 gain on redemption                               |  |   | (13,000 | )
|Series B Preferred Unit issuance costs                                                                    |  |   | (1,040  | )
|Distributions to general partnership units ($1.255 per unit)                                              |  |   | (30,661 | )
|Distributions to redeemable limited partnership units ($1.255 per unit)                                   |  |   | (3,135  | )
|Distributions preferred units ($0.385 per Series A Preferred unit and $12.50 per Series B Preferred unit) |  |   | (3,481  | )
|Allocation from redeemable limited partnership units                                                      |  |   | 5,481   |  
|Contribution from general partner related to amortization of stock-based compensation                     |  |   | 1,329   |  
|Unrealized holding loss on interest rate swaps                                                            |  |   | (3,220  | )
|Net loss                                                                                                  |  |   | (14,886 | )
|                                                                                                          |  |   |        
|Balance, December 31, 2001                                                                                |  | $ | 291,715 |  
|Issuance of general partnership units                                                                     |  |   | 39,646  |  
|Loss on redemption of Series B Preferred units, net of $1,040 in issuance costs                           |  |   | (850    | )
|Distributions to general partnership units ($1.00 per unit)                                               |  |   | (27,018 | )
|Distributions to redeemable limited partnership units ($1.00 per unit)                                    |  |   | (2,592  | )
|Distributions preferred units ($6.25 per Series B Preferred unit)                                         |  |   | (1,562  | )
|Allocation from redeemable limited partnership units                                                      |  |   | 1,278   |  
|Contribution from general partner related to amortization of stock-based compensation                     |  |   | 1,117   |  
|Reclassification of holding loss on interest rate swaps into earnings                                     |  |   | 3,220   |  
|Net loss                                                                                                  |  |   | (4,432  | )
|                                                                                                          |  |   |        
|Balance, December 31, 2002                                                                                |  | $ | 300,522 |  
|                                                                                                          |  |   |        

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

F-11

---



RFS PARNTERSHIP, L.P.  CONSOLIDATED STATEMENTS OF CASH FLOWS  For the Years Ended December 31, 2002, 2001 and 2000  (in thousands)

|                                                     |                                                                                          | 2002                                                                             |                                                  | 2001    |        | 2000    |        
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------ | ------- | ------ | ------- | -------
|Cash flows from operating activities:                |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     | Net income (loss)                                                                        |                                                                                  | $                                                | (4,432  | )      | $       | (14,886
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                                  |                                                  |         |        |         |        
|                                                     |                                                                                          | Depreciation and amortization                                                    |                                                  |         | 32,944 |         |        
|                                                     |                                                                                          | (Gain) loss on sale of assets, including loss on sale of discontinued operations |                                                  |         | 2,890  |         |        
|                                                     |                                                                                          | Write-off of loan costs                                                          |                                                  |         | 1,361  |         |        
|                                                     |                                                                                          | Changes in assets and liabilities:                                               |                                                  |         |        |         |        
|                                                     |                                                                                          |                                                                                  | Accounts receivable                              |         |        | 835     |        
|                                                     |                                                                                          |                                                                                  | Other assets                                     |         |        | (499    | )      
|                                                     |                                                                                          |                                                                                  | Deferred income taxes                            |         |        | (1,096  | )      
|                                                     |                                                                                          |                                                                                  | Accounts payable and accrued expenses            |         |        | 4,523   |        
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     |                                                                                          |                                                                                  | Net cash provided by operating activities        |         |        | 36,526  |        
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Cash flows from investing activities:                |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     | Investment in hotel properties and hotels under development                              |                                                                                  |                                                  | (14,576 | )      |         | (18,013
|                                                     | Cash paid for franchise fees                                                             |                                                                                  |                                                  | (172    | )      |         | (65    
|                                                     | Restricted cash                                                                          |                                                                                  |                                                  | 2,434   |        |         | (1,888 
|                                                     | Proceeds from sale of hotel properties                                                   |                                                                                  |                                                  | 4,175   |        |         | 11,324 
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     |                                                                                          |                                                                                  | Net cash used by investing activities            |         |        | (8,139  | )      
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Cash flows from financing activities:                |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     | Redemption of general partnership units                                                  |                                                                                  |                                                  |         |        |         |        
|                                                     | Net proceeds (payments) on line of credit                                                |                                                                                  |                                                  | (74,238 | )      |         | 30,914 
|                                                     | Proceeds from issuance of debt                                                           |                                                                                  |                                                  | 125,000 |        |         |        
|                                                     | Payments on mortgage notes payable                                                       |                                                                                  |                                                  | (60,668 | )      |         | (7,210 
|                                                     | Redemption of preferred units                                                            |                                                                                  |                                                  | (25,850 | )      |         | (13,000
|                                                     | Distributions to general partner and preferred unitholders                               |                                                                                  |                                                  | (28,712 | )      |         | (34,142
|                                                     | Distributions to limited partners                                                        |                                                                                  |                                                  | (2,592  | )      |         | (3,135 
|                                                     | Issuance of general partnership units, net of $0.3 million issuance costs in 2002        |                                                                                  |                                                  | 39,653  |        |         | 4,479  
|                                                     | Issuance of preferred units, net of $1.0 million issuance costs                          |                                                                                  |                                                  |         |        |         | 23,960 
|                                                     | Loan fees paid                                                                           |                                                                                  |                                                  | (4,777  | )      |         | (1,636 
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     |                                                                                          |                                                                                  | Net cash provided (used) by financing activities |         |        | (32,184 | )      
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                          |                                                                                  | (3,797                                           | )       |        | 2,054   |        
|Cash and cash equivalents at beginning of period     |                                                                                          |                                                                                  | 5,735                                            |         |        | 3,681   |        
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Cash and cash equivalents at end of period           |                                                                                          | $                                                                                | 1,938                                            |         | $      | 5,735   |        
|                                                     |                                                                                          |                                                                                  |                                                  |         |        |         |        
|Supplemental disclosure of cash flow information:    |                                                                                          |                                                                                  |                                                  |         |        |         |        
|                                                     | Cash paid for interest                                                                   |                                                                                  | $                                                | 22,059  |        | $       | 24,403 

Supplemental
disclosure of non-cash activities: See Note 10 to the consolidated financial statements

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

F-12

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF  RFS HOTEL INVESTORS, INC. AND RFS PARTNERSHIP, L.P.

Note 1. Organization

RFS Hotel Investors, Inc. ("RFS"), is a publicly held hotel real estate investment trust, which at December 31, 2002, owned interests in 57 Hotels
with 8,271 rooms located in 24 states through its approximate 92% interest in RFS Partnership, L.P. (the "Operating Partnership"). The Operating Partnership is the issuer of public debt. Because RFS
is the issuer of publicly held common stock and the Operating Partnership is the issuer of publicly held debt, both entities are required to file Form 10K's, either separately or combined. This
Form 10K represents a combined Form 10K for both RFS and the Operating Partnership. RFS, the Operating Partnership, and their subsidiaries are herein referred to, collectively, as the
"Company." Unless one of the notes to the consolidated financial statements specifically refers to either RFS or the Operating Partnership, the notes are applicable to both RFS and the Operating
Partnership as separate registrants.

Under
the REIT Modernization Act (the "RMA") that became effective January 1, 2001, the Company is permitted to lease its hotels to wholly-owned taxable real estate investment
trust ("REIT") subsidiaries of the Company ("TRS Lessees"), provided that the TRS Lessees engage a third-party management company to manage the hotels. Effective January 1, 2001, the Company
terminated its operating leases, management contracts and related ancillary agreements with Hilton Hotels Corporation ("Hilton") for approximately $65.5 million. This transaction represents the
cancellation of certain executory contracts some of which extended through 2012. As a result of this transaction, the Company began reporting hotel revenues and expenses rather than lease revenue.

The
following table provides a schedule of the hotels by brand at December 31, 2002 (unaudited):

Franchise Affiliation

Hotel Properties

Rooms/SuitesFull Service Hotels:Sheraton

4

864Holiday Inn

5

954Sheraton Four Points

2

412Independent

2

331Doubletree

1

221Hilton

1

23415

3,016Extended Stay Hotels:Residence Inn by Marriott

14

1,852TownePlace Suites by Marriott

3

285Homewood Suites by Hilton

1

8318

2,220Limited Service Hotels:Hampton Inn

17

2,112Holiday Inn Express

5

637Comfort Inn

1

184Courtyard by Marriott

1

10224

3,035Total

57

8,271


F-13

---

The
following summarizes the number of hotels owned for the periods presented:

2002

2001

2000Hotels owned at beginning of years

58

60

62Sales of hotels

(1
)
(2
)
(2
)Hotels owned at end of years

57

58

60


Note 2. Summary of Significant Accounting Policies

Principles of Consolidation.The consolidated financial statements include the accounts of RFS, the Operating Partnership and
each of their consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of Estimates.The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value of Financial Instruments.The Company's financial instruments include rents receivable, accounts payable, other
accrued expenses and mortgage loans payable. The fair values of these financial instruments, except for the mortgage loans payable are not materially different from their carrying or contract values.
The carrying values of the Company's borrowings are estimated to be below fair value by approximately $50.1 million due to changes in comparable interest rates.

Investment in Hotel Properties.Hotel properties are recorded at cost and are depreciated using the straight-line
method over estimated useful lives of 40 years for buildings and improvements and five to seven years for furniture and equipment. Repairs and maintenance costs are charged to expense as
incurred. The Company periodically reviews the carrying value of each Hotel to determine if circumstances exist indicating impairment in the carrying value of the investment in the hotel or that
depreciation periods should be modified. If circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows, without interest charges,
of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted cash flows. If impairment is indicated, an adjustment will be made to the carrying value of
the hotel based on discounted future cash flows.

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

Restricted Cash.Restricted cash includes amounts the Company must make available for the replacement and refurbishment of
furniture and equipment and amounts held in escrow by certain lenders for the payment of taxes and insurance.

Deferred Expenses.Deferred expenses, consisting of initial fees paid to franchisors, loan fees and other costs incurred in
issuing debt, are recorded at cost. Amortization of franchise fees is computed using the straight-line method over the lives of the franchise agreements, which range from 10 to
15 years. Amortization of loan fees and other costs incurred in issuing debt are computed using the

F-14

---

interest method over the maturity period of the related debt. Accumulated amortization of deferred expenses is $7.6 million and $6.6 million at December 31, 2002 and 2001,
respectively.

Minority Interest in Operating Partnership and other Consolidated Subsidiaries.Minority interest in the Operating
Partnership and other Consolidated Subsidiaries represents the limited partners' proportionate share of the equity in the Operating Partnership and other Consolidated Subsidiaries. Income (loss) is
allocated to minority interest based on the weighted average percentage ownership throughout the year.

Treasury Stock.The Board of Directors approved a stock repurchase program to buy back up to 3 million shares of
common stock on the open market subject to certain market conditions and other factors. During 2000, the Company repurchased 409 thousand shares of common stock at an average price per share of
$10.88 or $4.4 million, bringing the total number of shares repurchased under the program to 576 thousand.

Revenue Recognition.In accordance with Staff Accounting Bulletin (SAB) 101, lease revenue is recognized as income after
certain specific annual hurdles have been achieved by the lessee in accordance with the provisions of the lease agreements. The lessees are in compliance with their rental obligations under the
leases. For the years ended December 31, 2002 and 2001, five hotels were leased to third party lessees.

Income Taxes.The Company has elected to be treated as a REIT under the Internal Revenue Code. Prior to January 1,
2001, the Company, as a REIT, was not subject to federal income taxes. Under the RMA that became effective January 1, 2001, the Company leases all but five of its hotels to wholly-owned taxable
REIT subsidiaries that are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 109,"Accounting for Income Taxes."Under SFAS 109, the Company accounts for income taxes using the asset and liability method under
which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases.

Debt Extinguishment and Swap Termination Costs.The Company has elected to adopt the provisions of SFAS 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment ofFASB No. 13, and Technical Corrections," as of January 1,
2002. SFAS 145 rescinds the provisions of SFAS 4 that would have required the loss on the extinguishments of debt of $6.9 million (excludes the $3.2 million swap termination
costs) to be reported net of tax as an extraordinary item. Accordingly, these costs are included in debt extinguishment and swap termination costs in the accompanying 2002 statement of operations.

Stock Based Compensation.The Company accounts for share option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees("APB 25") and related Interpretations. Under APB 25, no compensation expense is recognized for employee share
option grants because the exercise price of the options granted to date has equaled the market price of the underlying shares on the date of grant (the "intrinsic value method").

F-15

---

Had
compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS 123, the Company's net income (loss) and earnings per share would have
been reduced to the pro forma amounts indicated below:

2002

2001

2000Net income (loss) applicable to common shareholders:As reported

$
(7,240
)
$
(11,713
)
$
29,378Pro forma

$
(7,728
)
$
(12,013
)
$
29,045Basic and diluted earnings (loss) per share:As reported

$
(0.26
)
$
(0.47
)
$
1.20Pro forma

$
(0.28
)
$
(0.48
)
$
1.18


The
FASB issued SFAS No. 148 "Accounting for Stock-Based CompensationTransition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company will
apply the fair value based method of accounting for stock-based employee compensation prospectively to all awards granted, modified, or settled beginning January 1, 2003.

Basic and Diluted Earnings Per Share or Unit.Basic earnings (loss) per share from continuing operations is computed by
dividing income (loss) from continuing operations, less preferred stock or unit dividends, plus (minus) the gain (loss) on sale of assets and plus (minus) the gain (loss) on redemption of Preferred
Stock or Units by the weighted average number of common shares or units outstanding during the period. Diluted earnings (loss) per share from continuing operations is computed by dividing income
(loss) from continuing operations, less preferred stock or unit dividends, plus (minus) the gain (loss) on sale of assets and plus (minus) the gain (loss) on redemption of Preferred Stock or Units by
the weighted average number of common shares or units and equivalents outstanding. Basic earnings
per share or unit is computed by dividing net income (loss) applicable to common shareholders/unitholders by the weighted average number of common shares or units outstanding during the period.
Diluted earnings per share or unit is computed by dividing net income (loss) applicable to common shareholders/unitholders by the weighted average number of common shares or units and equivalents
outstanding. Common share or unit equivalents represent shares or units issuable upon exercise of options. At December 31, 2000, six thousand shares or units were issuable pursuant upon the
exercise of options. For the years ended December 31, 2002 and 2001, 85 thousand and 135 thousand common share or unit equivalents pursuant upon the exercise of options would be
antidilutive, and accordingly, for those periods, are not assumed to be converted in the computation of diluted earnings per share or unit. In addition, for the year ended December 31, 2000,
the Company's Series A Preferred Stock or Units, if converted to common shares or units, would be antidilutive; accordingly, the Series A Preferred Stock or Units are not assumed to be
converted in the computation of diluted earnings per share or unit. In addition, the Series B Preferred Stock or Units are non-convertible and accordingly, are not included in the
computation of diluted earning per share or unit for the years ended December 31, 2002 and 2001.

Derivatives.Effective January 1, 2001, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 138, established accounting and reporting standards for derivative instruments and hedging activities. It required that an entity recognize all derivatives as

F-16

---

either assets or liabilities in the balance sheet and measure those instruments at fair value. Upon adoption of SFAS 133 on January 1, 2001, the Company recorded a liability of
approximately $0.8 million with a corresponding charge to other comprehensive income representing the fair value of its interest rate swap agreements. At December 31, 2001, the fair
value of the Company's interest rate swap agreements was a liability of approximately $3.2 million and was included in "Accounts payable and accrued expenses" with the related unrealized loss
recorded in other comprehensive income within shareholders' equity. In February 2002, the Company terminated both interest rate swap agreements and incurred a loss on termination of
approximately $3.2 million. This loss is included in debt extinguishment and swap termination costs on the 2002 statement of operations. This loss was reclassified from other comprehensive
income upon termination. At December 31, 2002, the Company had no outstanding derivative interest rate swap agreements.

In
the normal course of business, the Company is exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and
procedures including the use of derivatives (cash flow hedges). The Company does not use derivatives for trading or speculative purposes. Further, the Company has a policy of only entering into
contracts with major financial institutions based upon their credit ratings and other factors.

Segment Information.SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires the
disclosure of selected information about operating segments. Based on the guidance provided in the standard, the Company has determined that its business is conducted in one operating segment.

Distributions.The Company intends to pay regular quarterly distributions on its common shares or units and Operating
Partnership units and the current quarterly distribution is $0.25 per share or unit. The Company's ability to make distributions is dependent upon receipt of its quarterly distributions from the
Operating Partnership. The Operating Partnership's ability to make distributions is dependent upon the results of operations of the Company's hotels.

Note 3. Investment in Hotel Properties

Investment in hotel properties consists of the following at December 31, 2002, and 2001, respectively (in thousands):

2002

2001Land

$
69,639

$
70,401Building and improvements


545,557


543,912Furniture and equipment


124,496


115,479Capital improvements in progress


12,002


16,422751,694


746,214Accumulated depreciation


(158,405
)

(130,652
)$
593,289

$
615,562


Capitalized
interest was $16 thousand, $0 and $0.6 million for the years ended December 31 2002, 2001 and 2000, respectively.

F-17

---

Note 4. Debt

The following details the Company's debt outstanding at December 31, 2002 and 2001 and the net book value of the collateral pledged against the debt at
December 31, 2002 (dollar amounts in thousands):

|                    |  |               |  |               |  | Collateral |   |   |         |  
|------------------- |  | ------------- |  | ------------- |  | ---------- | - | - | ------- | -
|
|Variable Rate Debt: |  |               |  |               |  |            |   |   |         |  
|Line of Credit      |  | LIBOR + 250bp |  | July 2005     |  | 24         |   | $ | 212,823 |  
|Fixed Rate Debt:    |  |               |  |               |  |            |   |   |         |  
|Line of Credit      |  |               |  |               |  | (a         | ) |   | (a      | )
|Line of Credit      |  |               |  |               |  | (a         | ) |   | (a      | )
|Senior Notes        |  | 9.75%         |  | March 2010    |  |            |   |   |         |  
|Mortgage            |  | 6.83%         |  | August 2008   |  | 15         |   |   |         |  
|Mortgage            |  | 7.30%         |  | November 2011 |  | (b         | ) |   | (b      | )
|Mortgage            |  | 7.83%         |  | December 2008 |  | 10         |   |   | 122,307 |  
|Mortgage            |  | 8.22%         |  | November 2007 |  | 1          |   |   | 42,786  |  
|Mortgage            |  | 8.00%         |  | August 2010   |  | 8          |   |   | 81,866  |  
|                    |  |               |  |               |  |            |   |   |         |  
|                    |  |               |  |               |  |            |   | $ | 459,782 |  
|                    |  |               |  |               |  |            |   |   |         |  

---

On October 31, 2002, the Company concluded an amendment and extension of its $140 million Line of Credit. The amendment extends the
maturity of the facility from July 30, 2004 to July 30, 2005, and relaxes certain financial covenants, including the interest coverage, fixed charge coverage, and total leverage tests.
The interest rate on the $140 million Line of Credit that matures in July 2005 ranges from 150 basis points to 250 basis points above LIBOR, depending on the Company's ratio of total
debt to its investment in hotel properties (as defined). The average interest rate on outstanding contracts under the Line of Credit at December 31, 2002 was 3.9%, calculated as the LIBOR
interest rate of 1.4% plus 250 basis points. The Line of Credit is collateralized by first priority mortgages on 24 hotels that restrict the transfer, pledge or other hypothecation of the hotels
(collectively, the "Collateral Pool"). The Company may obtain a release of the pledge of any hotel in the Collateral Pool if the Company provides a substitute hotel or reduces the total availability
under the Line of Credit. Borrowings under the Line of Credit are limited to the Borrowing Base Value, which was $93.3 million at December 31, 2002. Accordingly, the Company had
borrowings available under the Line of Credit of approximately $86.4 million at December 31, 2002. The Line of Credit contains various covenants including the maintenance of a minimum
net worth, minimum debt and interest coverage ratios, and total indebtedness and liability limitations. The Company was in compliance with these covenants at December 31, 2002.

The
Company participated in two interest rate swap agreements, the first for a notional amount of $30 million and the second for a notional amount of $40 million, both of
which were terminated in
February, 2002 in conjunction with the issuance of $125 million senior notes. The Company incurred a loss of $3.2 million upon termination of the interest rate swap agreements. The
estimated unrealized

F-18

---

net loss on these instruments was approximately $3.2 million and $0.8 million at December 31, 2001 and 2000.

On
February 26, 2002, the Company sold $125 million of senior notes. The senior notes mature March 1, 2012 and bear interest at a rate of 9.75% per year, payable
semi-annually, in arrears, on March 1 and September 1 of each year, commencing on September 1, 2002. The senior notes are unsecured obligations of the Partnership and
are guaranteed by RFS and certain of its subsidiaries. The senior notes contain covenants that could, among other things, restrict RFS's ability to borrow money, pay dividends on or repurchase capital
stock, make investments, and sell assets or enter into mergers and consolidations. The Company was in compliance with these covenants at December 31, 2002. Net proceeds from the issuance of the
senior notes of $121.5 million were used to retire the 1996 CMBS mortgage debt on March 20, 2002 ($57.5 million outstanding), pay the prepayment penalty on the 1996 CMBS mortgage
debt of approximately $5.5 million, terminate the two outstanding interest rate swap agreements for approximately $3.2 million, with the balance used to reduce outstanding borrowings
under the line of credit. As a result of the prepayment of the 1996 CMBS debt, the Company expensed $1.4 million in unamortized debt costs.

The
Company's other borrowings are nonrecourse to the Company and contain provisions allowing for the substitution of collateral, upon satisfaction of certain conditions. Most of the
mortgage borrowings are prepayable and subject to various prepayment penalties, yield maintenance, or defeasance obligations. At December 31, 2002, approximately 98% of the Company's debt is
fixed at a weighted average interest rate of 8.7%.

Future
scheduled principal payments of debt obligations at December 31, 2002 are as follows (in thousands):

Amount2003

$
2,6952004


2,8882005


10,1112006


3,4242007


19,662Thereafter


252,449$
291,229


In
addition to the above principal payment of debt obligations as of December 31, 2002, the Company has a $3.0 million letter of credit outstanding. The letter of credit
serves as collateral on the worker's compensation plan for the benefit of the hotel employees of Flagstone Hospitality Management LLC ("Flagstone"). There are no outstanding balances on the letter of
credit. The Company is also committed to make future payments under various operating leases that are not significant.

The
Company in the future may seek to increase further the amount of its credit facilities, negotiate additional credit facilities, or issue corporate debt instruments. Although the
Company has no charter restrictions on the amount of indebtedness the Company may incur, the Board of Directors of the Company has adopted a current policy limiting the amount of indebtedness that the
Company will incur to an amount not in excess of approximately 45% of the Company's investment in hotel

F-19

---

properties, at cost, (as defined). The Board of Directors may change the debt policy at any time without shareholder approval.

The
Company may incur, or cause the Partnership to incur, indebtedness to meet distribution requirements imposed on a REIT under the Internal Revenue Code including the requirement that
a REIT distribute to its shareholders annually at least 90% of its taxable income to the extent that working capital and cash flow from the Company's investments are insufficient to make such
distributions.

Note 5. Income Taxes

The Company elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet a number of organizational and operational
requirements, including a requirement that it currently distribute as least 90% of its taxable income to its stockholders. It is management's current intention to adhere to these requirements and
maintain the Company's REIT status. As a REIT, the Company generally will not be subject to corporate level federal income taxes on taxable income it distributes currently to its stockholders. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not qualify as
a REIT for subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income
and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local
income taxes.

Prior
to January 1, 2001, the Company was not subject to federal income taxes. Under the RMA that became effective January 1, 2001, the Company leases 52 of its hotels to
wholly-owned taxable REIT subsidiaries that are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes."Under SFAS 109, the Company accounts for income taxes using the asset and
liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.

The
components of income tax expense (benefit) for the years ended December 31, 2002 and 2001 are as follows:

2002

2001Current:State




$
20Deferred:Federal

$
(1,096
)

(24,734
)Benefit from income taxes

$
(1,096
)
$
(24,714
)


The
benefit from income taxes was calculated using an effective tax rate of 38% applied to the income or losses of the TRS Lessees, adjusted for temporary differences related to the
Hilton lease termination transaction, operating losses, bad debts and contributions.

F-20

---

Deferred
income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and for operating loss
carryforwards. Significant components of the Company's deferred tax asset are as follows:

2002

2001Lease termination

$
19,583

$
22,228Operating loss carryforwards


6,175


2,470Other


72


36Deferred tax asset

$
25,830

$
24,734


The
Company's operating loss carryforwards, which are expected to provide future tax benefits, expire in 2021 ($2.5 million) and 2022 ($3.7 million). The Company believes
the TRS Lessees will generate sufficient future taxable income to realize in full the deferred tax asset, as such, no valuation allowance has been recorded at December 31, 2002 and 2001,
respectively.

The
reconciliation of the Company's statutory income tax rate to effective tax rate for the years ended December 31, 2002 and 2001 is as follows:

2002

2001Statutory U.S. Federal income tax benefit

35
%
35
%State income tax benefit

3
%
3
%Non-taxable REIT income

(22
)%
25
%Other

(3
)%
1
%Effective tax rate

13
%
64
%


Reconciliation between GAAP net income (loss) and REIT taxable income:

The following table reconciles the Company's GAAP net income (loss) to taxable income for the years ended December 31, 2002, 2001 and 2000:

2002

2001

2000GAAP net income (loss)

$
(3,788
)
$
(13,729
)
$
30,790Plus GAAP net loss on taxable subsidiaries included above


2,014


40,234


889GAAP net income from REIT operations (a)


(1,774
)

26,505


31,679Book/tax differences on minority interest share of TRS Lessees' loss


(505
)

(3,206
)Book/tax differences on depreciation and amortization


6,290


4,333


(2,005
)Book/tax differences on gains/losses from capital transactions


1,268


4,781


3,745Other book/tax differences, net


(94
)

(180
)

915Adjusted taxable income subject to distribution requirement (b)

$
5,185

$
32,233

$
34,334


---

F-21

---

Characterization of distributions:

The following table characterizes distributions paid per common share for the years ended December 31, 2002, 2001 and 2000:

2002

2001

2000$

%

$

%

$

%Ordinary income

$
0.13

13.3
%
$
0.90

71.6
%
$
1.43

92.8
%Return of capital


0.87

86.7
%

0.36

28.4
%

0.02

1.3
%Capital gains












0.01

0.3
%Unrecaptured Section 1250 gain












0.08

5.6
%$
1.00

100
%
$
1.26

100
%
$
1.54

100
%


Note 6. Capital Stock and Partnership Units

Common Stock.On February 20, 2002, RFS sold 1.15 million shares of common stock and contributed the net
proceeds to the Partnership in exchange for 1.15 million units. Proceeds of approximately $14.2 million (net of $0.2 million expenses) from the sale of the common stock were used
to reduce the outstanding balance on the line of credit.

On
June 4, 2002, RFS sold 2.0 million shares of common stock and contributed the net proceeds to the Partnership in exchange for 2.0 million units. Proceeds of
approximately $24.6 million (net of $0.1 million expenses), together with available cash, were used to redeem the Partnership's 250,000 outstanding Series B preferred units from
RFS.

Preferred Stock.The Board of Directors is authorized to provide for the issuance of up to 5 million shares of
Preferred Stock in one or more series, to establish the number of shares in each series and to fix the designation, powers, preferences and rights of each such series and the qualifications,
limitations or restrictions thereof.

In
1996, the Company issued to one of the lessees 973,684 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock"). The Company redeemed the
Series A Preferred Stock on January 1, 2001 for cash consideration of $13.0 million, which resulted in a gain on redemption of $5.1 million that is included in net income
(loss) applicable to common shareholders in 2001.

On
January 2, 2001, the Company issued 250,000 shares of non-convertible mandatorily redeemable Series B Preferred Stock for $25 million prior to fees
and expenses of approximately $1 million. Holders of the Series B Preferred Stock are entitled to receive quarterly cash dividends commencing March 31, 2001 at an annual rate of
12.5%. If not redeemed prior to January 1, 2006, the dividend rate increases 2.0% per annum up to a maximum rate of 20.5%. The Company may redeem shares of the Series B Preferred Stock
in whole but not in part, on or after December 31, 2003 at the original price of $25 million. If the shares are redeemed before December 31, 2003, the redemption price is at
varying amounts over the original share price. The shares are mandatorily redeemable by the

F-22

---

holders at varying premiums over the original share price upon a change of control, dissolution, or winding up of the Company or on the Company's failure to qualify as a REIT.

On
June 28, 2002, the Operating Partnership repurchased all of its Series B preferred units from RFS for an aggregate purchase price of $25,850,000, excluding dividends.
Correspondingly, RFS repurchased
all of its Series B Preferred Stock from an independent third party for an aggregate purchase price of $25,850,000, excluding dividends. In the second quarter of 2002, the Company expensed
$1.9 million in costs associated with the repurchase, comprised of $0.9 million related to prepayment costs and $1.0 million in issuance costs.

Operating Partnership Units.RFS is the sole general partner of the Operating Partnership and is obligated to contribute the
net proceeds from any issuance of its equity securities to the Operating Partnership in exchange for units of partnership interest ("Units") corresponding in number and terms to the equity securities
issued. The Operating Partnership may also issue Units to third parties in exchange for cash or property, and Units so issued to third parties are redeemable at the option of the holder for a like
number of shares of common stock of the Company, or cash, or a combination thereof, at the election of the Company.

The
ownership of the Operating Partnership is as follows at December 31, 2002 and 2001:

Common
Units

%

Series B
Preferred Units

%2002RFS Hotel Investors, Inc.

28,466,461

92.05
%Third parties

2,458,705

7.95
%Total

30,925,166

100.00
%2001RFS Hotel Investors, Inc.

25,234,877

91.12
%Third parties

2,458,705

8.88
%
250,000

100.00
%Total

27,693,582

100.00
%
250,000

100.00
%


General Partnership Units.On February 20, 2002, RFS sold 1.15 million shares of common stock and contributed
the net proceeds to the Operating Partnership in exchange for 1.15 million units. Proceeds of approximately $14.2 million (net of $0.2 million expenses) from the sale of the
common stock were used to reduce the outstanding balance on the line of credit.

On
June 4, 2002, RFS sold 2.0 million shares of common stock and contributed the net proceeds to the Operating Partnership in exchange for 2.0 million common units.
Proceeds of approximately $24.6 million (net of $0.1 million expenses), together with available cash, were used to redeem the Operating Partnership's 250,000 outstanding Series B
preferred units from RFS.

Redeemable Limited Partnership Units.The Operating Partnership has issued limited partnership units to third parties in
exchange for cash or property. The outstanding units of limited partnership interest in the Operating Partnership are redeemable at the option of the holder for a like number of shares of common stock
of RFS, or cash, or a combination thereof, at the election of RFS. Due to these redemption rights, these limited partnership units have been excluded from partners' capital and are included in
redeemable limited partnership units and measured at redemption value as of the end

F-23

---

of the periods presented based on the closing market price of RFS's common stock at December 31, 2002 and 2001, which was $10.86 and $11.38 respectively.

Preferred Units.Under the partnership agreement between RFS and the Operating Partnership, the Operating Partnership is
authorized to provide for the issuance of up to 5 million Preferred Units in one or more series, to establish the number of units in each series and to fix the designation, powers, preferences
and rights of each such series and the qualifications, limitations or restrictions thereof.

In
1996, the Operating Partnership issued to one of the lessees 973,684 units of Series A Convertible Preferred Units (the "Series A Preferred Units"). The Operating
Partnership redeemed the Series A Preferred Units on January 1, 2001 for cash consideration of $13.0 million, which resulted in a gain on redemption of $5.1 million that is
included in net income (loss) applicable to unitholders in 2001.

On
January 2, 2001, the Operating Partnership issued 250 thousand shares of non-convertible mandatorily redeemable Series B Preferred Units for
$25 million prior to fees and expenses of approximately $1 million. Holders of the Series B Preferred Units are entitled to receive quarterly cash dividends commencing
March 31, 2001 at an annual rate of 12.5%. If not redeemed prior to January 1, 2006, the dividend rate increases 2.0% per annum up to a maximum rate of 20.5%. The Operating Partnership
may redeem units of the Series B Preferred Units in whole but not in part, on or after December 31, 2003 at the original price of $25 million. If the units are redeemed before
December 31, 2003, the redemption price is at varying amounts over the original unit price. The units are mandatorily redeemable by the holders at varying premiums over the original unit price
upon a change of control, dissolution, or winding up of the Operating Partnership.

On
June 28, 2002, the Operating Partnership repurchased all of its Series B preferred units from RFS for an aggregate purchase price of $25,850,000, excluding dividends.
Correspondingly, RFS repurchased all of its Series B Preferred Stock from an independent third party for an aggregate purchase price of $25,850,000, excluding dividends. In the second quarter
of 2002, the Operating Partnership expensed $1.9 million in costs associated with the repurchase, comprised of $0.9 million related to prepayment costs and $1.0 million in
issuance costs.

When
RFS, the general partner, repurchases its outstanding common stock, the Operating Partnership repurchases a matching number of units held by RFS at an equal price. The Board of
Directors of RFS approved a stock repurchase program to buy back up to 3 million shares of common stock on the open market subject to certain market conditions and other factors. During 2000,
RFS repurchased 409 thousand shares at an average price per share of $10.88 or $4.4 million which has been recorded as a reduction to partners' capital as a result of the redemption of
units held by RFS to fund the repurchase, bringing the total number of shares repurchased under the program to 576 thousand.

Note 7. Commitments and Contingencies

The Company maintains comprehensive insurance on each of its hotels, including liability, fire and extended coverage, of the type and amount customarily obtained
for or by hotel owners. All 10 of the Company's hotels in California are located in areas that are subject to earthquake activity. These hotels are located in areas of high seismic risk and some were
constructed under building codes which were

F-24

---

less stringent with regard to earthquake related requirements. An earthquake could render significant damage to the Company's hotels. Additionally, areas in Florida where six of the Company's hotels
are located may experience hurricane or high-wind activity. The Company has earthquake insurance policies on its hotels in California and wind insurance policies on certain of its hotels
located in Florida. However, various types of catastrophic losses, like earthquakes and floods may not be fully insurable or may not be economically insurable. With respect to its hotels in
California, in addition to the applicable deductibles under its earthquake insurance policies, the Company is self-insured for the first $7.5 million per earthquake, and its
coverage is for losses up to $45 million per occurrence. The Company believes that this coverage is adequate based on an analysis performed by an independent third party for the benefit of the
Company. The Company maintains terrorism insurance, which the Company believes currently insures against losses resulting from a terrorist attach. In the event of a substantial loss, the Company's
insurance coverage may not be able to cover the full current market value or replacement cost of its lost investment. Inflation, changes in building codes and ordinances, environmental considerations
and other factors might also affect our ability to replace or renovate a hotel after it has been damaged or destroyed.

As
of December 31, 2002, the Company had a $3.0 million letter of credit outstanding. The letter of credit serves as collateral on the worker's compensation plan
set-up on behalf of the hotel employees of Flagstone. There are no outstanding balances on the letter of credit.

During
2002 and 2001, the Company received rental income from five hotels leased to third parties under leases which expire in 2007 (1 hotel), 2008 (2 hotels) and 2009 (2 hotels). During
2000, all of the Company's hotels were leased to third parties.

Each
lease provides for the payment of percentage rent each year based on the annual room revenues of the hotel, subject to a minimum base rent. The table below sets forth the percentage
rent and base rent earned by the Company for the years ended December 31, 2002, 2001 and 2000 (in thousands).

2002

2001

2000Base rent

$
2,487

$
2,442

$
40,073Percentage rent


2,742


3,340


66,501Base and percentage rent classified in discontinued operations








(573
)Total lease revenue

$
5,229

$
5,782

$
106,001


Minimum
future rental income (base rents) due the Company under these noncancelable operating leases at December 31, 2002, is as follows (in thousands):

Year

Amount2003


2,4892004


2,4892005


2,4892006


2,4892007


2,3262008 and thereafter


1,527$
13,809


F-25

---

Lease
revenue is based on a percentage of room revenues, food and beverage revenues and other revenues of the hotels. Both the base rent and the threshold room revenue in each lease
computation are adjusted annually for changes in the Consumer Price Index ("CPI"). The adjustment is calculated at the beginning of each calendar year. The CPI adjustments made in January 2002
and 2001 were 1.6% and 3.4%, respectively.

The
Company may terminate any lease agreement with respect to a hotel property upon the sale of a hotel property in exchange for a termination payment to the lessee. Under the percentage
leases, the Company is obligated to pay the costs of real estate taxes, property insurance, maintenance of underground utilities and structural elements of the Hotels, and to set aside a portion of
the hotels' revenues to fund capital expenditures for the periodic replacement or refurbishment of furniture, fixtures and equipment required for the retention of the franchise licenses with respect
to the hotels.

Note 8. Discontinued Operations

In 2002, the Company adopted the provisions of Financial Accounting Standard No. 144,Accounting for the Impairment or Disposal of
Long-Lived Assets("SFAS 144"). SFAS 144 establishes criteria beyond that previously specified in Statement of Financial Accounting Standard
No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of("SFAS 121"), to determine when a long-lived asset is classified as held for sale, and it provides a single accounting model for the disposal of long-lived assets. Due
to the adoption of SFAS 144, the Company now reports as discontinued operations any assets held for sale (as defined by SFAS 144), of which the Company has
none at December 31, 2002, and assets sold in the current period. All results of these discontinued operations, less applicable income taxes, are included in a separate component of income on
the consolidated statement of operations under the heading, "earnings (losses) from discontinued operations." This change has resulted in certain reclassifications of the previously reported 2001 and
2000 statements of operations.

In
2002, the Company sold its Comfort Inn in Fort Mill, South Carolina for $3.25 million in cash, resulting in a loss on sale of approximately $3.8 million. This loss, as
well as results of operations for this hotel for the years ending December 31, 2002, 2001 and 2000, are included on the consolidated statement of operations under the heading, "earnings
(losses) from discontinued operations." The

F-26

---

components of earnings (losses) from discontinued operations for the years ended December 31, 2002, 2001 and 2000 are shown below:

2002

2001

2000Hotel revenue

$
1,590

$
1,640

$
573Hotel operating costs


(1,110
)

(1,324
)Property taxes and insurance


(81
)

(81
)

(69
)Depreciation


(268
)

(315
)

(278
)Hilton lease termination





(7
)Operating income (loss) before minority interest


131


(87
)

226Minority interest


10


(7
)

18Income (loss) from operations


121


(80
)

208Loss on sale of discontinued operations


(3,840
)Earnings (losses) from discontinued operations

$
(3,719
)
$
(80
)
$
208


Note 9. Stock-Based Compensation Plans

RFS sponsors a Restricted Stock and Stock Option Plan (the "Plan") that provides for the grant of stock options to purchase a specified number of shares of common
stock ("Options") and grants of restricted shares of common stock ("Restricted Stock"). Upon issuance of any stock, RFS is obligated to contribute the proceeds to the Operating Partnership in exchange
for an equal number of Operating Partnership units. Under the Plan, approximately 2.3 million shares of common stock, of which 650 thousand shares may be restricted stock, are available
for awards to the officers and key employees of the Company and 675 thousand shares of common stock, of which 120 thousand shares may be restricted stock, are available for awards to
Directors of the Company who are not officers or employees. Options issued under the plan have a maximum term of ten years from the date of grant. The exercise price of the options shall be determined
on the date of each grant. Restricted shares vest between one and five years based on each individual award and these shares have voting and dividend rights from the date of grant.

F-27

---

A
summary of the RFS's stock options under the Plan as of December 31, 2002, 2001 and 2000, and the changes during the years are presented below (in thousands, except per share
data):

|                                   |  | 2002 |                 | 2001 |   | 2000 
|---------------------------------- |  | ---- | --------------- | ---- | - | -----
|
|Outstanding at beginning of years  |  |      | 1,388           |      | $ | 12.76
|Granted                            |  |      | 280             |      |   | 13.15
|Exercised                          |  |      | (89             | )    |   | 11.99
|Forfeited                          |  |      | (251            | )    |   | 16.14
|                                   |  |      |                 |      |   |      
|Outstanding at end of years        |  |      | 1,328           |      | $ | 12.25
|                                   |  |      |                 |      |   |      
|Exercisable at end of years        |  |      | 581             |      | $ | 12.45
|                                   |  |      |                 |      |   |      
|Weighted-average fair value        |  |      |                 |      | $ | 1.79 
|                                   |  |      |                 |      |   |      
|Price range of shares under option |  | $    | 10.50 to $16.87 |      |   |      

The weighted average remaining contractual life of options outstanding as of December 31, 2001 is 8.5 years.

The
fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend of $1.00
for 2002 grants, $1.10 for 2001 and $1.54 for 2000; volatility of 27.6% for 2002 grants, volatility of 26.7% for 2001 grants and volatility of 26.2% for 2000 grants, risk-free interest
rate of 4.9% for 2002, 4.8% for 2001 and 6.2% for 2000 and expected life of 6 years for 2002, 2001 and 2000.

Restricted Stock.A summary of the status of RFS's restricted stock grants as of December 31, 2002, 2001 and 2000 and
the changes during the years are presented below (value is computed as the weighted average fair market value of the restricted stock at grant date):

|                                 |  | 2002    |   | 2001 |       | 2000
|-------------------------------- |  | ------- | - | ---- | ----- | ----
|
|Outstanding at beginning of year |  | 611,667 |   | $    | 13.31 |     
|Granted, subject to vesting      |  | 10,500  |   | $    | 11.38 |     
|Forfeited                        |  | (3,333  | ) | $    | 13.06 |     
|                                 |  |         |   |      |       |     
|Outstanding at end of year       |  | 618,834 |   | $    | 13.28 |     
|                                 |  |         |   |      |       |     
|Vested at end of year            |  | 380,169 |   | $    | 13.43 |     
|                                 |  |         |   |      |       |     

Note 10. Supplemental Disclosure of Non-Cash Activities

RFS Hotel Investors, Inc.

In 2002, RFS:



F-28

---



In
2001, RFS:



In
2000, RFS:



RFS Partnership, L.P.

In 2002, the Operating Partnership:



In
2001, the Operating Partnership:



In
2000, the Operating Partnership:



F-29

---



Note 11. Consolidating Financial Information of RFS Partnership, L.P.

RFS Leasing II, Inc., RFS Leasing VII, Inc., RFS Financing Partnership, L.P., RFS Financing Corporation and RFS Financing 2002, LLC, wholly-owned
subsidiaries of the Operating Partnership ("Guarantor Subsidiaries"), have guaranteed on a full and unconditional basis, the payment of amounts due under the Operating Partnership's
$125 million senior notes. RFS Leasing II, Inc. and RFS Leasing VII, Inc. had no substantial operations prior to January 1, 2001. RFS Leasing II, Inc. leases 15
hotels directly from RFS Financing Partnership, L.P., which owns the fifteen hotels. RFS Leasing VII, Inc. leases 21 hotels from the Operating Partnership. As of and for the years ended
December 31, 2002 and 2001, RFS Leasing II, Inc. and RFS Leasing VII, Inc. did not have a material amount of assets, and incurred both operating and net losses. RFS Financing
2002, LLC was formed to facilitate the issuance of the senior notes in February, 2002. RFS Financing Corporation was formed to facilitate the issuance of the 1996 commercial mortgage bonds, which were
redeemed with a portion of the proceeds from the sale of the senior notes. RFS Financing Corporation and RFS Financing 2002, LLC have no operations or assets and no sources of revenue or cash flow.
Consequently, in the event that it becomes necessary for RFS Leasing II, Inc., RFS Leasing VII, Inc., RFS Financing 2002, LLC or RFS Financing Corporation to provide credit support for
the senior notes, RFS Leasing II, Inc., RFS Leasing VII, Inc., RFS Financing 2002, LLC and RFS Financing Corporation likely will not have sufficient cash flow to make any required
payments under the senior notes.

F-30

---



The following tables present consolidating information for the Operating Partnership, the Guarantor Subsidiaries and the non-guarantor subsidiaries.

Consolidating Balance Sheet  December 31, 2002  (in thousands)

|                                      |                                         | RFS
Partnership,
L.P. |         | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |         | Eliminations |         | Total
Consolidated
|------------------------------------- | --------------------------------------- | --------------------- | ------- | ---------------------- | - | -------------------------- | ------- | ------------ | ------- | ------------------
|ASSETS                                |                                         |                       |         |                        |   |                            |         |              |         |                   
|Investment in hotel properties, net   |                                         | $                     | 212,823 |                        | $ | 133,507                    |         | $            | 246,959 |                   
|Investment in consolidated entities   |                                         |                       | 253,921 |                        |   |                            |         |              | 18,962  |                   
|Cash and cash equivalents             |                                         |                       | 446     |                        |   | 825                        |         |              | 667     |                   
|Restricted cash                       |                                         |                       |         |                        |   |                            |         |              | 4,383   |                   
|Accounts receivable                   |                                         |                       | 2,596   |                        |   | 12,439                     |         |              | 10,901  |                   
|Deferred expenses, net                |                                         |                       | 6,578   |                        |   | 176                        |         |              | 2,051   |                   
|Other assets                          |                                         |                       | 1,478   |                        |   | 620                        |         |              | 1,614   |                   
|Deferred income taxes                 |                                         |                       |         |                        |   | 14,384                     |         |              | 11,446  |                   
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|                                      | Total assets                            |                       | $       | 477,842                |   | $                          | 161,951 |              | $       | 296,983           
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|LIABILITIES AND PARTNERS' CAPITAL     |                                         |                       |         |                        |   |                            |         |              |         |                   
|Accounts payable and accrued expenses |                                         | $                     | 18,668  |                        | $ | 9,432                      |         | $            | 17,340  |                   
|Borrowings on Line of Credit          |                                         |                       | 6,950   |                        |   |                            |         |              |         |                   
|Mortgage notes payable                |                                         |                       |         |                        |   |                            |         |              | 159,279 |                   
|Senior Notes Payable                  |                                         |                       | 125,000 |                        |   |                            |         |              |         |                   
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|                                      | Total liabilities                       |                       |         | 150,618                |   |                            | 9,432   |              |         | 176,619           
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|Redeemable units at redemption value  |                                         |                       | 26,702  |                        |   |                            |         |              |         |                   
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|General partnership units             |                                         |                       | 300,522 |                        |   | 152,519                    |         |              | 120,364 |                   
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|                                      | Total partners' capital                 |                       |         | 300,522                |   |                            | 152,519 |              |         | 120,364           
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|                                      | Total liabilities and partners' capital |                       | $       | 477,842                |   | $                          | 161,951 |              | $       | 296,983           
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   

F-31

---

Consolidating Balance Sheet  December 31, 2001  (in thousands)

|                                                                                                   |                                         | RFS
Partnership,
L.P. |         | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |         | Eliminations |         | Total
Consolidated |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------- | --------------------- | ------- | ---------------------- | - | -------------------------- | ------- | ------------ | ------- | ------------------ | -
|ASSETS                                                                                             |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|Investment in hotel properties, net                                                                |                                         | $                     | 216,228 |                        | $ | 143,523                    |         | $            | 255,811 |                    |  
|Investment in consolidated entities                                                                |                                         |                       | 195,290 |                        |   |                            |         |              | 12,963  |                    | $
|Cash and cash equivalents                                                                          |                                         |                       | 263     |                        |   | 3,467                      |         |              | 2,005   |                    |  
|Restricted cash                                                                                    |                                         |                       | 20      |                        |   | 11                         |         |              | 6,786   |                    |  
|Accounts receivable                                                                                |                                         |                       | 15,556  |                        |   | 16,969                     |         |              | 2,331   |                    |  
|Deferred expenses, net                                                                             |                                         |                       | 3,077   |                        |   | 1,512                      |         |              | 2,375   |                    |  
|Other assets                                                                                       |                                         |                       | 1,814   |                        |   | 487                        |         |              | 1,216   |                    |  
|Deferred income taxes                                                                              |                                         |                       |         |                        |   | 13,552                     |         |              | 11,182  |                    |  
|                                                                                                   |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|                                                                                                   | Total assets                            |                       | $       | 432,248                |   | $                          | 179,521 |              | $       | 294,669            |  
|                                                                                                   |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|LIABILITIES AND PARTNERS' CAPITAL                                                                  |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|Accounts payable and accrued expenses                                                              |                                         | $                     | 6,365   |                        | $ | 4,709                      |         | $            | 26,281  |                    | $
|Borrowings on Line of Credit                                                                       |                                         |                       | 81,188  |                        |   |                            |         |              |         |                    |  
|Mortgage notes payable                                                                             |                                         |                       |         |                        |   | 58,181                     |         |              | 176,766 |                    |  
|                                                                                                   |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|                                                                                                   | Total liabilities                       |                       |         | 87,553                 |   |                            | 62,890  |              |         | 203,047            |  
|                                                                                                   |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|Series B Preferred Units, $.01 par value, 5,000 units authorized, 250 units issued and outstanding |                                         |                       | 25,000  |                        |   |                            |         |              |         |                    |  
|                                                                                                   |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|Redeemable units at redemption value                                                               |                                         |                       | 27,980  |                        |   |                            |         |              |         |                    |  
|                                                                                                   |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|Other comprehensive income                                                                         |                                         |                       | (3,220  | )                      |   |                            |         |              |         |                    |  
|General partnership units                                                                          |                                         |                       | 294,935 |                        |   | 116,631                    |         |              | 91,622  |                    |  
|                                                                                                   |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|                                                                                                   | Total partners' capital                 |                       |         | 291,715                |   |                            | 116,631 |              |         | 91,622             |  
|                                                                                                   |                                         |                       |         |                        |   |                            |         |              |         |                    |  
|                                                                                                   | Total liabilities and partners' capital |                       | $       | 432,248                |   | $                          | 179,521 |              | $       | 294,669            |  
|                                                                                                   |                                         |                       |         |                        |   |                            |         |              |         |                    |  

F-32

---



Consolidating Statement of Operations  For the Year Ended December 31, 2002  (in thousands)

|                                                             |                                                          | RFS
Partnership,
L.P.    |        | Guarantor
Subsidiaries |        | Non-Guarantor
Subsidiaries |         | Eliminations |        | Total
Consolidated |       
|------------------------------------------------------------ | -------------------------------------------------------- | ------------------------ | ------ | ---------------------- | ------ | -------------------------- | ------- | ------------ | ------ | ------------------ | ------
|Revenue:                                                     |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|                                                             | Rooms                                                    |                          |        |                        |        | $                          | 112,969 |              | $      | 56,388             |       
|                                                             | Food and beverage                                        |                          |        |                        |        |                            | 12,241  |              |        | 5,211              |       
|                                                             | Other operating departments                              |                          |        |                        |        |                            | 3,631   |              |        | 2,818              |       
|                                                             | Lease revenue                                            |                          | $      | 27,071                 |        |                            | 20,569  |              |        | 2,487              |       
|                                                             | Other                                                    |                          |        | 911                    |        |                            | 31      |              |        | 177                |       
|                                                             |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|                                                             |                                                          | Total hotel revenue      |        |                        | 27,982 |                            |         | 149,441      |        |                    | 67,081
|                                                             |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|Hotel operating expenses:                                    |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|                                                             | Rooms                                                    |                          |        |                        |        |                            | 23,557  |              |        | 11,122             |       
|                                                             | Food and beverage                                        |                          |        |                        |        |                            | 9,455   |              |        | 3,338              |       
|                                                             | Other operating departments                              |                          |        |                        |        |                            | 1,313   |              |        | 561                |       
|Undistributed operating expenses:                            |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|                                                             | Property operating costs                                 |                          |        |                        |        |                            | 15,371  |              |        | 6,427              |       
|                                                             | Property taxes, insurance and other                      |                          |        | 3,393                  |        |                            | 3,581   |              |        | 5,562              |       
|                                                             | Franchise costs                                          |                          |        | (193                   | )      |                            | 10,273  |              |        | 6,185              |       
|                                                             | Maintenance and repair                                   |                          |        |                        |        |                            | 6,494   |              |        | 2,991              |       
|                                                             | Management fees                                          |                          |        |                        |        |                            | 3,185   |              |        | 1,691              |       
|                                                             | Percentage lease expense                                 |                          |        |                        |        |                            | 44,898  |              |        |                    |       
|                                                             | Depreciation                                             |                          |        | 10,213                 |        |                            | 7,228   |              |        | 12,371             |       
|                                                             | Amortization of franchise fees and unearned compensation |                          |        | 1,181                  |        |                            | 40      |              |        | 26                 |       
|                                                             | General and administrative                               |                          |        | 697                    |        |                            | 10,684  |              |        | 7,698              |       
|                                                             |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|                                                             |                                                          | Total operating expenses |        |                        | 15,291 |                            |         | 136,079      |        |                    | 57,972
|                                                             |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|Operating income                                             |                                                          |                          | 12,691 |                        |        | 13,362                     |         |              | 9,109  |                    |       
|Debt extinguishments and swap termination costs              |                                                          |                          | 3,210  |                        |        | 6,912                      |         |              |        |                    |       
|Amortization of loan origination costs                       |                                                          |                          | 1,302  |                        |        | 16                         |         |              | 299    |                    |       
|Interest expense                                             |                                                          |                          | 11,692 |                        |        | 1,599                      |         |              | 12,901 |                    |       
|Equity in earnings (loss) of consolidated subsidiaries       |                                                          |                          | 1,894  |                        |        |                            |         |              | 1,527  |                    |       
|                                                             |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|Income (loss) from continuing operations before income taxes |                                                          |                          | (5,407 | )                      |        | 4,835                      |         |              | (5,618 | )                  |       
|Benefit from income taxes                                    |                                                          |                          |        |                        |        | (832                       | )       |              | (264   | )                  |       
|                                                             |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|Income (loss) from continuing operations                     |                                                          |                          | (5,407 | )                      |        | 5,667                      |         |              | (5,354 | )                  |       
|Losses from discontinued operations                          |                                                          |                          |        |                        |        | (3,709                     | )       |              |        |                    |       
|Gain (loss) on sale of assets                                |                                                          |                          | 975    |                        |        |                            |         |              | (25    | )                  |       
|                                                             |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|Net income (loss)                                            |                                                          |                          | (4,432 | )                      |        | 1,958                      |         |              | (5,379 | )                  |       
|Loss on redemption of preferred units                        |                                                          |                          | (1,890 | )                      |        |                            |         |              |        |                    |       
|Preferred unit dividends                                     |                                                          |                          | (1,562 | )                      |        |                            |         |              |        |                    |       
|                                                             |                                                          |                          |        |                        |        |                            |         |              |        |                    |       
|Net income (loss) applicable to unitholders                  |                                                          | $                        | (7,884 | )                      | $      | 1,958                      |         | $            | (5,379 | )                  | $     
|                                                             |                                                          |                          |        |                        |        |                            |         |              |        |                    |       

F-33

---

Consolidating Statement of Operations  For the Year Ended December 31, 2001  (in thousands)

|                                                       |                                                          | RFS
Partnership,
L.P.    |         | Guarantor
Subsidiaries |        | Non-Guarantor
Subsidiaries |         | Eliminations |         | Total
Consolidated |       
|------------------------------------------------------ | -------------------------------------------------------- | ------------------------ | ------- | ---------------------- | ------ | -------------------------- | ------- | ------------ | ------- | ------------------ | ------
|Revenue:                                               |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|                                                       | Rooms                                                    |                          |         |                        |        | $                          | 121,140 |              | $       | 66,004             |       
|                                                       | Food and beverage                                        |                          |         |                        |        |                            | 12,556  |              |         | 5,139              |       
|                                                       | Other operating departments                              |                          |         |                        |        |                            | 5,180   |              |         | 3,864              |       
|                                                       | Lease revenue                                            |                          | $       | 29,455                 |        |                            | 23,172  |              |         | 2,651              |       
|                                                       | Other                                                    |                          |         | 1,715                  |        |                            | 96      |              |         | 279                |       
|                                                       |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|                                                       |                                                          | Total hotel revenue      |         |                        | 31,170 |                            |         | 162,144      |         |                    | 77,937
|                                                       |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|Hotel operating expenses:                              |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|                                                       | Rooms                                                    |                          |         |                        |        |                            | 24,049  |              |         | 12,568             |       
|                                                       | Food and beverage                                        |                          |         |                        |        |                            | 10,171  |              |         | 3,362              |       
|                                                       | Other operating departments                              |                          |         |                        |        |                            | 1,521   |              |         | 642                |       
|Undistributed operating expenses:                      |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|                                                       | Property operating costs                                 |                          |         |                        |        |                            | 15,249  |              |         | 6,944              |       
|                                                       | Property taxes, insurance and other                      |                          |         | 3,392                  |        |                            | 3,454   |              |         | 5,921              |       
|                                                       | Franchise costs                                          |                          |         | (216                   | )      |                            | 10,436  |              |         | 6,637              |       
|                                                       | Maintenance and repair                                   |                          |         |                        |        |                            | 6,482   |              |         | 3,094              |       
|                                                       | Management fees                                          |                          |         |                        |        |                            | 3,966   |              |         | 1,755              |       
|                                                       | Percentage lease expense                                 |                          |         |                        |        |                            | 55,403  |              |         | (5,907             | )     
|                                                       | Depreciation                                             |                          |         | 9,037                  |        |                            | 6,726   |              |         | 13,527             |       
|                                                       | Lease termination                                        |                          |         |                        |        |                            | 35,657  |              |         | 29,832             |       
|                                                       | Amortization of franchise fees and unearned compensation |                          |         | 1,315                  |        |                            | 41      |              |         | 28                 |       
|                                                       | General and administrative                               |                          |         | 1,384                  |        |                            | 10,420  |              |         | 7,442              |       
|                                                       |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|                                                       |                                                          | Total operating expenses |         |                        | 14,912 |                            |         | 183,575      |         |                    | 85,845
|                                                       |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|Operating income (loss)                                |                                                          |                          | 16,258  |                        |        | (21,431                    | )       |              | (7,908  | )                  |       
|Amortization of loan origination costs                 |                                                          |                          | 903     |                        |        | 146                        |         |              | 305     |                    |       
|Interest expense                                       |                                                          |                          | 7,355   |                        |        | 4,650                      |         |              | 14,200  |                    |       
|Equity in earnings (loss) of consolidated subsidiaries |                                                          |                          | (22,886 | )                      |        |                            |         |              | (22,047 | )                  |       
|                                                       |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|Loss from continuing operations before income taxes    |                                                          |                          | (14,886 | )                      |        | (26,227                    | )       |              | (44,460 | )                  |       
|Benefit from income taxes                              |                                                          |                          |         |                        |        | (13,552                    | )       |              | (11,162 | )                  |       
|                                                       |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|Loss from continuing operations                        |                                                          |                          | (14,886 | )                      |        | (12,675                    | )       |              | (33,298 | )                  |       
|Losses from discontinued operations                    |                                                          |                          |         |                        |        | (87                        | )       |              |         |                    |       
|Gain on sale of assets                                 |                                                          |                          |         |                        |        |                            |         |              | 1,127   |                    |       
|                                                       |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|Net loss                                               |                                                          |                          | (14,886 | )                      |        | (12,762                    | )       |              | (32,171 | )                  |       
|Gain on redemption of preferred units                  |                                                          |                          | 5,141   |                        |        |                            |         |              |         |                    |       
|Preferred unit dividends                               |                                                          |                          | (3,125  | )                      |        |                            |         |              |         |                    |       
|                                                       |                                                          |                          |         |                        |        |                            |         |              |         |                    |       
|Net loss applicable to unitholders                     |                                                          | $                        | (12,870 | )                      | $      | (12,762                    | )       | $            | (32,171 | )                  | $     
|                                                       |                                                          |                          |         |                        |        |                            |         |              |         |                    |       

F-34

---

Consolidating Statement of Operations  For the Year Ended December 31, 2000  (in thousands)

|                                                |                                                          | RFS
Partnership,
L.P.    |        | Guarantor
Subsidiaries |        | Non-Guarantor
Subsidiaries |        | Eliminations |        | Total
Consolidated |       
|----------------------------------------------- | -------------------------------------------------------- | ------------------------ | ------ | ---------------------- | ------ | -------------------------- | ------ | ------------ | ------ | ------------------ | ------
|Revenuer:                                       |                                                          |                          |        |                        |        |                            |        |              |        |                    |       
|                                                | Lease revenue                                            |                          | $      | 43,716                 |        | $                          | 24,442 |              | $      | 37,843             |       
|                                                | Other                                                    |                          |        | 2,221                  |        |                            | 37     |              |        | 177                |       
|                                                |                                                          |                          |        |                        |        |                            |        |              |        |                    |       
|                                                |                                                          | Total hotel revenue      |        |                        | 45,937 |                            |        | 24,479       |        |                    | 38,020
|                                                |                                                          |                          |        |                        |        |                            |        |              |        |                    |       
|Undistributed operating expenses:               |                                                          |                          |        |                        |        |                            |        |              |        |                    |       
|                                                | Property taxes, insurance and other                      |                          |        | 4,529                  |        |                            | 2,177  |              |        | 3,972              |       
|                                                | Depreciation                                             |                          |        | 11,687                 |        |                            | 5,817  |              |        | 9,416              |       
|                                                | Amortization of franchise fees and unearned compensation |                          |        | 610                    |        |                            | 41     |              |        | 23                 |       
|                                                | General and administrative                               |                          |        | 3,617                  |        |                            | 100    |              |        | 2,587              |       
|                                                |                                                          |                          |        |                        |        |                            |        |              |        |                    |       
|                                                |                                                          | Total operating expenses |        |                        | 20,443 |                            |        | 8,135        |        |                    | 15,998
|                                                |                                                          |                          |        |                        |        |                            |        |              |        |                    |       
|Operating income                                |                                                          |                          | 25,494 |                        |        | 16,344                     |        |              | 22,022 |                    |       
|Amortization of loan origination costs          |                                                          |                          | 678    |                        |        | 140                        |        |              | 218    |                    |       
|Interest expense                                |                                                          |                          | 8,623  |                        |        | 4,452                      |        |              | 11,591 |                    |       
|Equity in earnings of consolidated subsidiaries |                                                          |                          | 21,164 |                        |        |                            |        |              |        |                    |       
|                                                |                                                          |                          |        |                        |        |                            |        |              |        |                    |       
|Income from continuing operations               |                                                          |                          | 37,357 |                        |        | 11,752                     |        |              | 10,213 |                    |       
|Earnings from discontinued operations           |                                                          |                          |        |                        |        | 226                        |        |              |        |                    |       
|Loss on sale of assets                          |                                                          |                          | (3,349 | )                      |        |                            |        |              | (1,027 | )                  |       
|                                                |                                                          |                          |        |                        |        |                            |        |              |        |                    |       
|Net income                                      |                                                          |                          | 34,008 |                        |        | 11,978                     |        |              | 9,186  |                    |       
|Preferred unit dividends                        |                                                          |                          | (1,412 | )                      |        |                            |        |              |        |                    |       
|                                                |                                                          |                          |        |                        |        |                            |        |              |        |                    |       
|Net income applicable to unitholders            |                                                          | $                        | 32,596 |                        | $      | 11,978                     |        | $            | 9,186  |                    | $     
|                                                |                                                          |                          |        |                        |        |                            |        |              |        |                    |       

F-35

---



Consolidating Statement of Cash Flows  For the Year Ended December 31, 2002  (in thousands)

|                                                     |  | RFS
Partnership,
L.P. |         | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |   | Total
Consolidated |       
|---------------------------------------------------- |  | --------------------- | ------- | ---------------------- | - | -------------------------- | - | ------------------ | ------
|Cash flows from (used in) operating activities       |  | $                     | 36,108  |                        | $ | 10,066                     |   | $                  | (9,648
|Cash flows from (used in) investing activities       |  |                       | (64,421 | )                      |   | 45,484                     |   |                    | 10,798
|Cash flows from (used in) financing activities       |  |                       | 28,496  |                        |   | (58,192                    | ) |                    | (2,488
|                                                     |  |                       |         |                        |   |                            |   |                    |       
|Net increase (decrease) in cash and cash equivalents |  |                       | 183     |                        |   | (2,642                     | ) |                    | (1,338
|Cash and cash equivalents at beginning of period     |  |                       | 263     |                        |   | 3,467                      |   |                    | 2,005 
|                                                     |  |                       |         |                        |   |                            |   |                    |       
|Cash and cash equivalents at end of period           |  | $                     | 446     |                        | $ | 825                        |   | $                  | 667   
|                                                     |  |                       |         |                        |   |                            |   |                    |       

Consolidating Statement of Cash Flows  For the Year Ended December 31, 2001  (in thousands)

|                                                     |  | RFS
Partnership,
L.P. |         | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |   | Total
Consolidated |        
|---------------------------------------------------- |  | --------------------- | ------- | ---------------------- | - | -------------------------- | - | ------------------ | -------
|Cash flows from (used in) operating activities       |  | $                     | 26,229  |                        | $ | (14,993                    | ) | $                  | (770   
|Cash flows from (used in) investing activities       |  |                       | (34,462 | )                      |   | (13,540                    | ) |                    | 39,360 
|Cash flows from (used in) financing activities       |  |                       | 7,447   |                        |   | 31,864                     |   |                    | (39,081
|                                                     |  |                       |         |                        |   |                            |   |                    |        
|Net increase (decrease) in cash and cash equivalents |  |                       | (786    | )                      |   | 3,331                      |   |                    | (491   
|Cash and cash equivalents at beginning of period     |  |                       | 1,049   |                        |   | 136                        |   |                    | 2,496  
|                                                     |  |                       |         |                        |   |                            |   |                    |        
|Cash and cash equivalents at end of period           |  | $                     | 263     |                        | $ | 3,467                      |   | $                  | 2,005  
|                                                     |  |                       |         |                        |   |                            |   |                    |        

Consolidating Statement of Cash Flows  For the Year Ended December 31, 2000  (in thousands)

|                                                     |  | RFS
Partnership,
L.P. |         | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |   | Total
Consolidated |        
|---------------------------------------------------- |  | --------------------- | ------- | ---------------------- | - | -------------------------- | - | ------------------ | -------
|Cash flows from operating activities                 |  | $                     | 28,142  |                        | $ | 18,515                     |   | $                  | 18,566 
|Cash flows from (used in) investing activities       |  |                       | 67,997  |                        |   | (14,966                    | ) |                    | (63,874
|Cash flows from (used in) financing activities       |  |                       | (98,741 | )                      |   | (3,551                     | ) |                    | 45,680 
|                                                     |  |                       |         |                        |   |                            |   |                    |        
|Net increase (decrease) in cash and cash equivalents |  |                       | (2,602  | )                      |   | (2                         | ) |                    | 372    
|Cash and cash equivalents at beginning of period     |  |                       | 3,651   |                        |   | 138                        |   |                    | 2,124  
|                                                     |  |                       |         |                        |   |                            |   |                    |        
|Cash and cash equivalents at end of period           |  | $                     | 1,049   |                        | $ | 136                        |   | $                  | 2,496  
|                                                     |  |                       |         |                        |   |                            |   |                    |        

Note 12. Recent Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") of the FASB has set forth in EITF Issue No 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also included
(1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a

F-36

---

one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 will be effective for exit or disposal
activities initiated after December 31, 2002. We believe that SFAS No. 146 will have no effect on our results of operations and financial position.

The
FASB has issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," which is effective for certain transactions arising on or after October 1, 2002. SFAS
No. 147 will have no impact on the Company.

The
FASB has issued SFAS No. 148 "Accounting for Stock-Based CompensationTransition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure requirements of SFAS No. 148. As of December 31, 2002, the Company
accounts for stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. However, the Company will apply
the fair value based method of accounting for stock-based employee compensation prospectively to all awards granted, modified, or settled beginning January 1, 2003.

FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," ("FIN 45") was issued in November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor's recognized
liability over the term of the related guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company has made the disclosures required by FIN 45.

FASB
Interpretation No. 46, "Consolidation of Variable Interest Entitiesan interpretation of ARB No. 51," ("FIN 46") was issued in January 2003. FIN 46
requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN 46 applies
immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The
Company has no ownership interest in variable interest entities that would be consolidated under the requirements of FIN 46

Note 13. Subsequent Events

On March 3, 2003, the Company's Board of Directors declared a first quarter distribution of $0.25 per common share or unit, payable on March 31,
2003, to holders of record on March 17, 2003.

F-37

---



REPORT OF INDEPENDENT ACCOUNTANTS

To
the Board of Directors of
RFS Hotel Investors, Inc.

Our
audits of the consolidated financial statements referred to in our report dated January 29, 2003, except for Note 13 as to which the date is March 3, 2003,
appearing on pages F-1 and F-7 of the 2002 Form 10-K of RFS Hotel Investors, Inc. and RFS Partnership, L.P. also included an audit of the financial
statement schedule listed in Item 15 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers
LLP

Dallas,
Texas
January 29, 2003

F-38

---

RFS HOTEL INVESTORS, INC.
SCHEDULE IIIREAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2002
(in thousands)

|                    |                       |  |      |   |   |       |  | Cost Capitalized
Subsequent to Acquisition |       | Gross Amount at Which Carried
at end of Period |     |  |   |       |  |   |       |  |   |       
|------------------- | --------------------- |  | ---- | - | - | ----- |  | ------------------------------------------ | ----- | ---------------------------------------------- | --- |  | - | ----- |  | - | ----- |  | - | ------
|
|
|
|Sheraton Hotel      |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Clayton, MO           |  | (1   | ) | $ | 1,599 |  | $                                          | 4,968 |                                                |     |  | $ | 7,411 |  | $ | 1,599 |  | $ | 12,379
|Holiday Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Columbia, SC          |  | (1   | ) |   | 790   |  |                                            | 3,573 |                                                |     |  |   | 2,026 |  |   | 790   |  |   | 5,599 
|Holiday Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Louisville, KY        |  | (1   | ) |   | 1,328 |  |                                            | 3,808 |                                                |     |  |   | 2,029 |  |   | 1,328 |  |   | 5,837 
|Comfort Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Marietta, GA          |  | none |   |   | 989   |  |                                            | 5,509 |                                                |     |  |   | 702   |  |   | 989   |  |   | 6,211 
|Holiday Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Lafayette, LA         |  | (1   | ) |   | 700   |  |                                            | 8,858 |                                                |     |  |   | 2,349 |  |   | 700   |  |   | 11,207
|Residence Inn       |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Kansas City, MO       |  | (2   | ) |   | 392   |  |                                            | 5,344 |                                                |     |  |   | 982   |  |   | 392   |  |   | 6,326 
|Hampton Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Ft Lauderdale, FL     |  | (1   | ) |   | 590   |  |                                            | 4,664 |                                                |     |  |   | 705   |  |   | 590   |  |   | 5,369 
|Holiday Inn Express |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Arlington Heights, IL |  | (1   | ) |   | 350   |  |                                            | 4,121 |                                                |     |  |   | 646   |  |   | 350   |  |   | 4,767 
|Hampton Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Denver, CO            |  | (1   | ) |   | 500   |  |                                            | 8,098 |                                                |     |  |   | 455   |  |   | 500   |  |   | 8,553 
|Holiday Inn Express |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Downers Grove, IL     |  | (1   | ) |   | 400   |  |                                            | 5,784 |                                                |     |  |   | 601   |  |   | 400   |  |   | 6,385 
|Hampton Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Indianapolis, IN      |  | (2   | ) |   | 475   |  |                                            | 8,008 |                                                |     |  |   | 602   |  |   | 475   |  |   | 8,610 
|Hampton Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Lincoln, NE           |  | (1   | ) |   | 350   |  |                                            | 4,829 |                                                |     |  |   | 479   |  |   | 350   |  |   | 5,308 
|Hampton Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Bloomington, MN       |  | (2   | ) |   | 375   |  |                                            | 8,657 |                                                |     |  |   | 603   |  |   | 375   |  |   | 9,260 
|Holiday Inn Express |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Bloomington, MN       |  | (1   | ) |   | 780   |  |                                            | 6,910 |                                                | 152 |  |   | 1,094 |  |   | 932   |  |   | 8,004 
|Hampton Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Minnetonka, MN        |  | (1   | ) |   | 475   |  |                                            | 5,066 |                                                |     |  |   | 273   |  |   | 475   |  |   | 5,339 
|Hampton Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Oklahoma City, OK     |  | none |   |   | 530   |  |                                            | 6,826 |                                                |     |  |   | 1,095 |  |   | 530   |  |   | 7,921 
|Hampton Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Omaha, NE             |  | none |   |   | 450   |  |                                            | 6,362 |                                                |     |  |   | 872   |  |   | 450   |  |   | 7,234 
|Hampton Inn         |                       |  |      |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |       
|                    | Tulsa, OK             |  | (1   | ) |   | 350   |  |                                            | 5,715 |                                                |     |  |   | 820   |  |   | 350   |  |   | 6,535 

F-39

---

RFS HOTEL INVESTORS, INC.
SCHEDULE IIIREAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2002
(in thousands)

|                    |                  |  |      |   |       |  |        | Cost Capitalized
Subsequent to Acquisition |     | Gross Amount at Which Carried
at end of Period |       |  |       |  |        |  |        |  |       | 
|------------------- | ---------------- |  | ---- | - | ----- |  | ------ | ------------------------------------------ | --- | ---------------------------------------------- | ----- |  | ----- |  | ------ |  | ------ |  | ----- | 
|
|
|
|Holiday Inn Express |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Wauwatosa, WI    |  | (2   | ) | 700   |  | 4,926  |                                            |     |                                                | 818   |  | 700   |  | 5,744  |  | 6,444  |  | 1,138 | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Fishkill, NY     |  | (1   | ) | 2,280 |  | 10,484 |                                            |     |                                                | 935   |  | 2,280 |  | 11,419 |  | 13,699 |  | 2,256 | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Providence, RI   |  | none |   | 1,385 |  | 7,742  |                                            |     |                                                | 530   |  | 1,385 |  | 8,272  |  | 9,657  |  | 1,679 | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Tyler, TX        |  | (1   | ) | 855   |  | 6,212  |                                            |     |                                                | 744   |  | 855   |  | 6,956  |  | 7,811  |  | 1,368 | 
|Hampton Inn         |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Memphis, TN      |  | (2   | ) | 980   |  | 6,157  |                                            |     |                                                | 293   |  | 980   |  | 6,450  |  | 7,430  |  | 1,286 | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Ft Worth, TX     |  | none |   | 985   |  | 10,726 |                                            |     |                                                | 1,059 |  | 985   |  | 11,785 |  | 12,770 |  | 2,272 | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Wilmington, DE   |  | (1   | ) | 1,100 |  | 8,488  |                                            |     |                                                | 363   |  | 1,100 |  | 8,851  |  | 9,951  |  | 1,806 | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Torrance, CA     |  | (1   | ) | 2,600 |  | 17,789 |                                            |     |                                                | 1,928 |  | 2,600 |  | 19,717 |  | 22,317 |  | 3,832 | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Ann Arbor, MI    |  | none |   | 525   |  | 4,461  |                                            | 227 |                                                | 3,378 |  | 752   |  | 7,839  |  | 8,591  |  | 1,350 | 
|Holiday Inn         |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Flint, MI        |  | (1   | ) | 1,220 |  | 11,994 |                                            |     |                                                | 541   |  | 1,220 |  | 12,535 |  | 13,755 |  | 2,505 | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Charlotte, NC    |  | none |   | 850   |  | 3,844  |                                            | 159 |                                                | 3,435 |  | 1,009 |  | 7,279  |  | 8,288  |  | 1,092 | 
|Holiday Inn Express |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Austin, TX       |  | none |   | 500   |  | 4,737  |                                            |     |                                                | 627   |  | 500   |  | 5,364  |  | 5,864  |  | 985   | 
|Hampton Inn         |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Lakewood, CO     |  | none |   | 957   |  | 6,790  |                                            |     |                                                | 393   |  | 957   |  | 7,183  |  | 8,140  |  | 1,358 | 
|Hampton Inn         |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Hattiesburg, MS  |  | none |   | 785   |  | 4,653  |                                            |     |                                                | 1,843 |  | 785   |  | 6,496  |  | 7,281  |  | 1,167 | 
|Hampton Inn         |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Laredo, TX       |  | (1   | ) | 1,037 |  | 4,116  |                                            |     |                                                | 143   |  | 1,037 |  | 4,259  |  | 5,296  |  | 767   | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Atlanta, GA      |  | (1   | ) | 1,306 |  | 10,200 |                                            |     |                                                | 776   |  | 1,306 |  | 10,976 |  | 12,282 |  | 1,905 | 
|Holiday Inn         |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Crystal Lake, IL |  | none |   | 1,665 |  | 10,932 |                                            |     |                                                | 1,494 |  | 1,665 |  | 12,426 |  | 14,091 |  | 2,044 | 
|Residence Inn       |                  |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                    | Orlando, FL      |  | none |   | 1,045 |  | 8,880  |                                            |     |                                                | 342   |  | 1,045 |  | 9,222  |  | 10,267 |  | 1,639 | 

F-40

---

RFS HOTEL INVESTORS, INC.
SCHEDULE IIIREAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2002
(in thousands)

|                      |                     |  |      |   |       |  |        | Cost Capitalized
Subsequent to Acquisition |     | Gross Amount at Which Carried
at end of Period |       |  |       |  |        |  |        |  |       | 
|--------------------- | ------------------- |  | ---- | - | ----- |  | ------ | ------------------------------------------ | --- | ---------------------------------------------- | ----- |  | ----- |  | ------ |  | ------ |  | ----- | 
|
|
|
|Residence Inn         |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Sacramento, CA      |  | none |   | 1,000 |  | 13,122 |                                            |     |                                                | 392   |  | 1,000 |  | 13,514 |  | 14,514 |  | 2,320 | 
|Doubletree Hotel      |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Del Mar, CA         |  | none |   | 1,500 |  | 13,535 |                                            | 294 |                                                | 898   |  | 1,794 |  | 14,433 |  | 16,227 |  | 2,285 | 
|Courtyard by Marriott |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Flint, MI           |  | (1   | ) | 600   |  | 4,852  |                                            |     |                                                | 144   |  | 600   |  | 4,996  |  | 5,596  |  | 763   | 
|Hampton Inn           |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Sedona, AZ          |  | (1   | ) | 1,464 |  | 3,858  |                                            |     |                                                | 182   |  | 1,464 |  | 4,040  |  | 5,504  |  | 533   | 
|Hampton Inn           |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Chandler, AZ        |  | (1   | ) | 485   |  | 3,950  |                                            |     |                                                | 76    |  | 485   |  | 4,026  |  | 4,511  |  | 553   | 
|Hampton Inn           |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Houston, TX         |  | (1   | ) | 606   |  | 4,919  |                                            |     |                                                | 68    |  | 606   |  | 4,987  |  | 5,593  |  | 731   | 
|Sheraton Hotel        |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Milpitas, CA        |  | (2   | ) | 5,253 |  | 23,169 |                                            |     |                                                | 792   |  | 5,253 |  | 23,961 |  | 29,214 |  | 3,515 | 
|Sheraton Hotel        |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Sunnyvale, CA       |  | (2   | ) | 785   |  | 22,401 |                                            |     |                                                | 879   |  | 785   |  | 23,280 |  | 24,065 |  | 3,417 | 
|Sheraton Four Points  |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Pleasanton, CA      |  | (2   | ) | 1,935 |  | 19,251 |                                            |     |                                                | 1,103 |  | 1,935 |  | 20,354 |  | 22,289 |  | 2,935 | 
|Sheraton Four Points  |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Bakersfield, CA     |  | (2   | ) | 1,390 |  | 7,554  |                                            |     |                                                | 647   |  | 1,390 |  | 8,201  |  | 9,591  |  | 1,173 | 
|Beverly Heritage      |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Milpitas, CA        |  | (1   | ) | 5,250 |  | 25,118 |                                            |     |                                                | 4,896 |  | 5,250 |  | 30,014 |  | 35,264 |  | 3,824 | 
|Sheraton Hotel        |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Birmingham, AL      |  | (1   | ) | 3,103 |  | 13,491 |                                            |     |                                                | 1,688 |  | 3,103 |  | 15,179 |  | 18,282 |  | 1,850 | 
|Residence Inn         |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Jacksonville, FL    |  | (1   | ) | 1,339 |  | 4,990  |                                            |     |                                                | 63    |  | 1,339 |  | 5,053  |  | 6,392  |  | 648   | 
|Residence Inn         |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | West Palm Beach, FL |  | (1   | ) | 1,293 |  | 4,025  |                                            |     |                                                | 14    |  | 1,293 |  | 4,039  |  | 5,332  |  | 486   | 
|Hampton Inn           |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Jacksonville, FL    |  | (1   | ) | 1,047 |  | 4,375  |                                            |     |                                                | 50    |  | 1,047 |  | 4,425  |  | 5,472  |  | 529   | 
|Homewood Suites       |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | Chandler, AZ        |  | (1   | ) | 485   |  | 4,601  |                                            |     |                                                | 37    |  | 485   |  | 4,638  |  | 5,123  |  | 545   | 
|Hotel Rex             |                     |  |      |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       | 
|                      | San Francisco, CA   |  | (1   | ) | 3,000 |  | 11,039 |                                            |     |                                                | 317   |  | 3,000 |  | 11,356 |  | 14,356 |  | 1,297 | 

F-41

---

RFS HOTEL INVESTORS, INC.
SCHEDULE IIIREAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2002
(in thousands)

|                 |                   |  |   |        |   |   |        | Cost Capitalized
Subsequent to Acquisition |   | Gross Amount at Which Carried
at end of Period |  |   |     |  |   |        |  |   |        | 
|---------------- | ----------------- |  | - | ------ | - | - | ------ | ------------------------------------------ | - | ---------------------------------------------- |  | - | --- |  | - | ------ |  | - | ------ | 
|
|
|
|Hilton           |                   |  |   |        |   |   |        |                                            |   |                                                |  |   |     |  |   |        |  |   |        | 
|                 | San Francisco, CA |  | $ | 18,556 |   |   | 3,007  |                                            |   | 28,308                                         |  |   |     |  |   | 11,707 |  |   | 3,007  | 
|TownPlace Suites |                   |  |   |        |   |   |        |                                            |   |                                                |  |   |     |  |   |        |  |   |        | 
|                 | Ft. Worth, TX     |  |   | (1     | ) |   | 753    |                                            |   | 4,721                                          |  |   |     |  |   | 107    |  |   | 753    | 
|TownPlace Suites |                   |  |   |        |   |   |        |                                            |   |                                                |  |   |     |  |   |        |  |   |        | 
|                 | Miami, FL         |  |   | (1     | ) |   | 895    |                                            |   | 5,187                                          |  |   |     |  |   | 31     |  |   | 895    | 
|TownPlace Suites |                   |  |   |        |   |   |        |                                            |   |                                                |  |   |     |  |   |        |  |   |        | 
|                 | Miami (West), FL  |  |   | (1     | ) |   | 914    |                                            |   | 5,210                                          |  |   |     |  |   | 173    |  |   | 914    | 
|Unimproved land  |                   |  |   |        |   |   |        |                                            |   |                                                |  |   |     |  |   |        |  |   |        | 
|                 | Crystal Lake, IL  |  |   | none   |   |   | 504    |                                            |   |                                                |  |   |     |  |   |        |  |   | 504    | 
|                 |                   |  |   |        |   |   |        |                                            |   |                                                |  |   |     |  |   |        |  |   |        | 
|                 | Totals            |  |   |        |   | $ | 68,806 |                                            | $ | 477,907                                        |  | $ | 832 |  | $ | 67,650 |  | $ | 69,638 | 
|                 |                   |  |   |        |   |   |        |                                            |   |                                                |  |   |     |  |   |        |  |   |        | 

2002

2001

2000Cost of land and improvements, buildings and improvements:Balance at beginning of year

$
614,313

$
613,733

$
618,066Additions


8,051


11,849


17,179Disposals


(7,169
)

(11,269
)

(21,512
)Balance at end of year

$
615,195

$
614,313

$
613,733Accumulated depreciation on land improvements, buldings and improvementsBalance at beginning of year

$
76,437

$
64,247

$
53,124Additions


13,789


13,571


16,994Disposals


(1,473
)

(1,381
)

(5,871
)Balance at end of year

$
88,753

$
76,437

$
64,247


F-42

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