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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, 2001
|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 34-0-22164

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RFS HOTEL INVESTORS, INC.(Exact name of Registrant as specified in its Charter)

|Tennessee
(State or other Incorporation)                                                                                                                      |  | 62-1534743
(I.R.S. Employer Identification Number)
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|                                                                                                                                                              |  |                                                   
|850 Ridge Lake Boulevard, Suite 300
Memphis, Tennessee 38120
(901) 767-7005
(Address of principal executive offices, including zip code and telephone number)

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

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

Common
Stock $0.01 par value
(Title of Class)

New
York Stock Exchange
(Name of Market)

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Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the past
90 days.    ý Yes    oNo

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

The
aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $382,732,967 based on the last sale price in the New York Stock
Exchange for such stock on March 14, 2002.

The
number of shares of the Registrant's Common Stock outstanding was 26,395,377 as of March 14, 2002.

Documents
Incorporated by Reference
Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders are incorporated into Part I and Part III.

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PART I

Item 1.Business

RFS Hotel Investors, Inc. ("RFS" or the "Company") is a self-administered hotel real estate investment trust ("REIT") headquartered in Memphis,
Tennessee. 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 58 hotels
with approximately 8,400 rooms in 24 states at December 31, 2001. Many of the Company's hotels are located in attractive metropolitan areas or rapidly 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, 2001, the Company generated approximately 93% of the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA"), as defined herein, from hotels operating under nationally recognized brands from these franchisors.

RFS
is the sole general partner of RFS Partnership, L.P. (the "Partnership") and, at December 31, 2001, owned an approximately 91% interest in the Partnership. RFS, the
Partnership, and their subsidiaries are herein referred to collectively, as the "Company". Substantially all of the Company's business activities are conducted through the Partnership. For the year
ended December 31, 2001, the Company generated revenues of $221.9 million and EBITDA of $81.8 million.

In
2001, the Company received 42% of its EBITDA from full service hotels, 33% from extended stay hotels and 25% from limited service hotels. The Company received 65% of its EBITDA in
five states (California (37%), Florida (10%), Texas (7%), Michigan (6%) and Illinois (5%)).

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The
following summarizes additional information for the 58 hotels owned at December 31, 2001:

Franchise Affiliation

Hotel
Properties

Rooms/Suites

2001 EBITDA (1)
(In thousands)Full Service Hotels:Sheraton

4

864

$
10,749Holiday Inn

5

954


8,359Independent

2

331


4,771Four Points by Sheraton

2

412


4,673Hilton

1

234


3,418Doubletree

1

221


2,45415

3,016


34,424Extended Stay Hotels:Residence Inn by Marriott

14

1,851


24,015TownePlace Suites by Marriott

3

285


2,231Homewood Suites by Hilton

1

83


52118

2,219


26,767Limited Service Hotels:Hampton Inn(1)

17

2,113


13,621Holiday Inn Express

5

637


4,363Courtyard by Marriott

1

102


1,134Comfort Inn(1)

2

337


1,09625

3,189


20,214Total

58

8,424

$
81,405


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

2001

2000

1999Hotels owned at beginning of years

60

62

60Acquisitions and developed hotels placed into service





2Sales of hotels

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

58

60

62


At
December 31, 2001, the Company leased five hotels to two third-party lessees. Fifty-one 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

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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 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:



All
of the hotels continue to operate under the same franchise affiliation as prior to the contract termination.

Effective
January 1, 2001, the TRS Lessees entered into new management contracts with Flagstone. Flagstone is a recently formed company owned by MeriStar 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, 2001, the Company generated 37% of its EBITDA in California, 10% in Florida, 7% in Texas, 6% in Michigan, 5% in Illinois and 35% in 19 other states, and
the Company generated 42% of its EBITDA from full service hotels, 33% from extended stay hotels and 25% from limited service hotels. No single hotel accounted for more than 6% of the Company's EBITDA
for the year ended December 31, 2001.

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

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below this target ratio. At December 31, 2001, the Company's ratio of total debt to investment in hotel properties, at cost, as defined, was 38%. Additionally, the Company's ratios of debt to
EBITDA and EBITDA to interest expense for the year ended December 31, 2001 were 3.7x and 3.3x, 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 significant
returns on investments on the Company's hotel properties. For the years ended December 31, 2001, 2000, and 1999, the un-leveraged return on investment for our comparable hotels was
11.3%, 13.4%, and 12.8%, respectively. Based upon the Company's 38% to 40% leverage and its 7.44% to 7.9% average borrowing costs in those years, the Company's leveraged return on investment was
13.4%, 16.8%, and 16.4%, respectively.

Favorable Corporate Structure.As a result of the REIT Modernization Act, 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 53 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 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. Bob Solmson, the Company's Chairman of the Board and Chief Executive Officer, founded RFS in 1993 and has been
actively involved in the real estate and hotel businesses since 1974. Randy 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 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 four fiscal years, the Company has spent approximately $86 million upgrading, renovating and redeveloping existing hotels in
order to enhance their competitive position and improve cash flow. Recent examples of this strategy include:



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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 provided by
these franchisors. For the year ended December 31, 2001, the Company generated 93% 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 pursue its acquisition strategy by focusing its acquisition activities primarily on individual 200 to 500-room hotels with the potential for
attractive returns and which meet one or more of the following criteria:



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 four years, the Company has sold 10 non-core properties for approximately $61.9 million.

Recent Developments

On February 20, 2002, the Company completed the sale of 1.15 million shares of common stock, including shares that were issued upon the exercise of
the underwriter's over-allotment option. Net proceeds of approximately $14.2 million from the sale of the common stock were used to reduce the outstanding balance on the line of
credit.

On
February 26, 2002, the Company sold $125 million of senior notes. The senior notes are unsecured and guaranteed by the Company and certain of its subsidiaries. The
Company has or is expected to use the net proceeds to retire the 1996 CMBS mortgage debt ($58.2 million outstanding at December 31, 2001), pay the prepayment penalty on the 1996 CMBS
mortgage debt of approximately $6.5 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 will also expense as an extraordinary item $1.4 million in unamortized debt costs.

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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. Furthermore, management's long-term compensation is based, in part, on maintaining leverage below this target ratio. At December 31, 2001, the company's ratio of total debt to
investment in hotel properties, at cost, as defined, was 38%. Additionally, the Company's ratios of debt to EBITDA and EBITDA to interest expense for the year ended December 31, 2001 were 3.7x
and 3.3x, respectively.

The
interest rate on the $140 million Line of Credit that matures in July 2004 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 interest rate on the variable contracts of the Line of Credit outstanding at December 31, 2001 was 4.03%, calculated
as the LIBOR interest rate of 2.03% plus 200 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 $111.4 million at December 31, 2001. 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, 2001.

The
Company participates in two interest rate swap agreements. One of the interest rate swap agreements is for a notional amount of $30 million maturing in July 2003. Under
this interest rate swap agreement, the Company receives payments based on the one month LIBOR rate of 2.14% and pays a fixed rate of 4.775% at December 31, 2001. In addition, the Company
participates in a second interest rate swap agreement for a notional amount of $40 million maturing in July 2003. Under the second interest rate swap agreement, the Company receives
payments based on the one-month LIBOR rate of 2.14% and pays a fixed rate of 6.535% at December 31, 2001.

The
differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to
interest expense by the Company pursuant to the terms of the agreements and have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk that the counterparties
may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, which is limited to major banks and financial institutions,
and does not anticipate non-performance by the counterparties. Net receipts (payments) under the interest rate swap agreements were $(1.3) million and $0.1 million for the years
ended December 31, 2001 and 2000.

The
fair value of the interest rate swap agreements are estimated based on quotes from the market makers of these instruments and represents the estimated amounts the Company would
expect to receive or pay to terminate the agreements. Credit and market risk exposures are limited to the net interest differentials. The estimated unrealized net loss on these instruments was
approximately $3.2 million and $0.8 million at December 31, 2001 and 2000.

The
Company's other borrowings are nonrecourse to the Company and contain provisions allowing for the substitution of collateral (except for the 1996 CMBS debt which matures in two
tranches in August 2008 and November 2011), upon satisfaction of certain conditions, after the respective loans have been outstanding for approximately four years. Most of the mortgage
borrowings are repayable and subject to various prepayment penalties, yield maintenance, or defeasance obligations. At

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December 31, 2001 and 2000, approximately 96% of RFS' debt is fixed at an average interest rate of 7.7%.

On
January 2, 2001, the Company issued 250 thousand shares of non-convertible mandatorily redeemable Series B Preferred Stock for $25 million
before fees and expenses of approximately $1 million. Holders of the Series B Preferred Stock are entitled to receive quarterly cash dividends at an annual rate of 12.5% of the
liquidation preference of the shares. If not repaid, beginning 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 stated value of $25 million. If the shares are redeemed before December 31, 2003,
the redemption price is at varying premiums over the liquidation preference. The shares are mandatorily redeemable upon a change of control, dissolution or winding up of the Company or on the
Company's failure to qualify as a REIT.

The
Company believes that it maintains a conservative dividend policy. Based on 2001 results the Company's dividend payout ratio was approximately 68% (dividends divided by funds from
operations) and the dividend coverage ratio was 1.5x (funds from operations divided by dividends).

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, ADR and RevPar 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, 2001, the Company had a total of 23 employees. Robert M. Solmson, (age 54), Chairman of the Board and Chief Executive Officer, Randy L.
Churchey, (age 41), President and Chief Operating Officer, Kevin M. Luebbers, (age 35), Executive Vice President and Chief Financial Officer, and Craig Hofer (age 42), 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 Company's 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.

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.

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, the Company 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

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years involved. Although the Company 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 the Company 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 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.

Risks Related to the Company and the Conduct of Business

The events of September 11, 2001, as well as the U.S. economic recession, 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, the Company's hotels had begun experiencing declining RevPAR 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 and the effects of the economic recession have led to a substantial reduction in business and leisure
travel throughout the United States and industry RevPAR generally. RevPAR at the Company's hotels specifically has declined substantially since September 11. While RevPAR at the Company's
hotels has improved from the depressed levels in the weeks following

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the events of September 11, RevPAR at the Company's hotels remains below pre-September 11 levels and may remain at such depressed levels. The Company cannot predict the
extent to which the events of September 11 will continue to directly or indirectly impact the hotel industry or the Company's operating results in the future. Continued lower RevPAR 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 could have further material adverse effects
on the hotel industry and the Company's operations.

New 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 53 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 damage to the hotels.
Additionally, areas in Florida, 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 $5 million per earthquake. Property insurance, which the Company believes currently insures against losses resulting from a terrorist attack, is subject to renewal in July 2002.
Upon renewal, the Company does not know whether its property insurance will protect against losses resulting from a terrorist attack. The Company believes that such losses may not be economically
insurable. 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.

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

For the year ended December 31, 2001, approximately 65% of the Company's EBITDA came from its hotels located in California (37%), Florida (10%), Texas
(7%), Michigan (6%) 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 has recently suffered an economic downturn related to the decline in the technology and Internet related markets which populated this area. 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. For the year ended December 31, 2001, the Company received approximately 37% of its EBITDA from hotels in portions of California, including Silicon Valley (18%), Los Angeles (7%), San
Francisco (5%), San Diego (4%) and Sacramento (3%). As a result of the events of September 11 and the continued economic recession in the fourth quarter of 2001, while the Company's entire
hotel portfolio was adversely impacted, the six San Francisco Bay Area hotels were particularly affected. The six San Francisco Bay Area hotels' RevPAR declined 42.7% in the fourth quarter of 2001.
The remaining four California hotels' RevPAR declined 2.3% and the entire portfolio RevPAR, excluding our six San Francisco Bay Area hotels, declined 6.9% in the fourth quarter of 2001.

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 appears to be 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, RevPAR, 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.

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 Hospitality Management 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, RevPAR 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 51 of the 58 hotels, the Company may experience significant disruptions at its hotels and in its operations generally and decreased occupancy.
Flagstone is a recently formed company with a limited operating history. Furthermore, because the Company must have third-party managers to maintain its REIT status, it may be forced to enter into new
management

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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 RFS. 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 RFS. This competition may also increase the
bargaining power of property owners seeking to sell to RFS, 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 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 and 2001, the Company spent approximately $32.6 million and
$18.0 million, respectively, on capital improvements to its hotels. The Company expects to spend approximately $9.0 million on capital improvements to its

12

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hotels in 2002. The Company's current indebtedness, as well as the 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:



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

According to Smith Travel Research, for all U.S. hotels, room supply in 2001 increased 2.4% while demand decreased by 3.4% and this trend may continue for the
immediate future. Additionally, industry RevPAR in 2001 decreased 6.9% as compared to the same period in 2000, and is expected to decrease slightly in 2002.

If
the Company is unable to sustain appropriate levels of RevPAR, 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

13

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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 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.

14

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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, however, 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 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 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

15

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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, RFS formed the TRS Lessees, which currently lease 53 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 Company does not
expect to pay any material state or federal income taxes in the next several years. The after-tax net income of the TRS Lessees is available for distribution to the shareholders as
dividends.

Ownership Limitation

In order for the Company 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 Company's 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 Company's
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 the Company
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. The Company 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 the Company's 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 the Company. 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.

16

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Item 2.Properties

The following sets forth information regarding the Company's hotels as of, and for the year ended December 31, 2001. Pursuant to management agreements
between the TRS Lessees and Flagstone, Flagstone manages 51 of the Company's 58 hotels. As indicated below, the remaining seven hotels are leased to or managed by other hotel management companies.

|                              |                              |                             |      |  |     | Year Ended
December 31, 2001 |   |      
|----------------------------- | ---------------------------- | --------------------------- | ---- |  | --- | ---------------------------- | - | -----
|
|
|Full Service                  |                              |                             |      |  |     |                              |   |      
|Beverly Heritage              |                              |                             |      |  |     |                              |   |      
|                              | Milpitas, California         |                             | 1988 |  | 237 |                              | $ | 7,623
|Doubletree                    |                              |                             |      |  |     |                              |   |      
|                              | San Diego, California        |                             | 1990 |  | 221 |                              |   | 7,173
|Hilton                        |                              |                             |      |  |     |                              |   |      
|                              | San Francisco, California    |                             | 1976 |  | 234 |                              |   | 8,967
|Holiday Inn                   |                              |                             |      |  |     |                              |   |      
|                              | Crystal Lake, Illinois       |                             | 1988 |  | 197 |                              |   | 4,676
|                              | Louisville, Kentucky         |                             | 1970 |  | 169 |                              |   | 2,589
|                              | Lafayette, Louisiana         |                             | 1983 |  | 242 |                              |   | 3,985
|                              | Flint, Michigan              |                             | 1990 |  | 171 |                              |   | 4,610
|                              | Columbia, South Carolina     |                             | 1969 |  | 175 |                              |   | 3,025
|Hotel Rex                     |                              |                             |      |  |     |                              |   |      
|                              | San Francisco, California(1) |                             | 1912 |  | 94  |                              |   | 3,328
|Four Points by Sheraton       |                              |                             |      |  |     |                              |   |      
|                              | Bakersfield, California      |                             | 1983 |  | 198 |                              |   | 4,039
|                              | Pleasanton, California       |                             | 1985 |  | 214 |                              |   | 6,179
|Sheraton                      |                              |                             |      |  |     |                              |   |      
|                              | Birmingham, Alabama          |                             | 1984 |  | 205 |                              |   | 3,702
|                              | Milpitas, California         |                             | 1988 |  | 229 |                              |   | 8,717
|                              | Sunnyvale, California        |                             | 1980 |  | 173 |                              |   | 7,131
|                              | Clayton, Missouri            |                             | 1965 |  | 257 |                              |   | 6,244
|                              |                              |                             |      |  |     |                              |   |      
|                              |                              | Full Service Total/Average  |      |  |     | 3,016                        |   | $    
|                              |                              |                             |      |  |     |                              |   |      
|Extended Stay                 |                              |                             |      |  |     |                              |   |      
|Homewood Suites by Hilton     |                              |                             |      |  |     |                              |   |      
|                              | Chandler, Arizona            |                             | 1998 |  | 83  |                              | $ | 1,907
|Residence Inn by Marriott     |                              |                             |      |  |     |                              |   |      
|                              | Sacramento, California       |                             | 1987 |  | 176 |                              |   | 5,528
|                              | Torrance, California         |                             | 1984 |  | 247 |                              |   | 8,404
|                              | Wilmington, Delaware         |                             | 1989 |  | 120 |                              |   | 3,461
|                              | Jacksonville, Florida(2)     |                             | 1997 |  | 120 |                              |   | 3,157
|                              | Orlando, Florida             |                             | 1984 |  | 176 |                              |   | 4,953
|                              | West Palm Beach, Florida(2)  |                             | 1998 |  | 78  |                              |   | 2,305
|                              | Atlanta, Georgia             |                             | 1987 |  | 128 |                              |   | 3,127
|                              | Ann Arbor, Michigan          |                             | 1985 |  | 114 |                              |   | 3,320
|                              | Kansas City, Missouri        |                             | 1987 |  | 96  |                              |   | 2,465
|                              | Charlotte, North Carolina(1) |                             | 1984 |  | 116 |                              |   | 2,223
|                              | Fishkill, New York           |                             | 1988 |  | 136 |                              |   | 5,614
|                              | Warwick, Rhode Island        |                             | 1989 |  | 96  |                              |   | 3,710
|                              | Ft. Worth, Texas             |                             | 1983 |  | 120 |                              |   | 3,611
|                              | Tyler, Texas                 |                             | 1985 |  | 128 |                              |   | 2,712
|TownePlace Suites by Marriott |                              |                             |      |  |     |                              |   |      
|                              | Miami Lakes, Florida(2)      |                             | 1999 |  | 95  |                              |   | 1,461
|                              | Miami West, Florida(2)       |                             | 1999 |  | 95  |                              |   | 2,003
|                              | Fort Worth, Texas            |                             | 1998 |  | 95  |                              |   | 1,443
|                              |                              |                             |      |  |     |                              |   |      
|                              |                              | Extended Stay Total/Average |      |  |     | 2,219                        |   | $    
|                              |                              |                             |      |  |     |                              |   |      

17

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|Limited Service     |                             |                               |                         |  |     |       |       |       |        |        
|------------------- | --------------------------- | ----------------------------- | ----------------------- |  | --- | ----- | ----- | ----- | ------ | -------
|Comfort Inn         |                             |                               |                         |  |     |       |       |       |        |        
|                    | Marietta, Georgia           |                               | 1989                    |  | 184 |       | $     | 2,400 |        | $      
|                    | Ft. Mill, South Carolina    |                               | 1987                    |  | 153 |       |       | 1,581 |        |        
|Courtyard           |                             |                               |                         |  |     |       |       |       |        |        
|                    | Flint, Michigan             |                               | 1996                    |  | 102 |       |       | 2,490 |        |        
|Hampton Inn         |                             |                               |                         |  |     |       |       |       |        |        
|                    | Chandler, Arizona           |                               | 1997                    |  | 101 |       |       | 1,711 |        |        
|                    | Sedona, Arizona             |                               | 1997                    |  | 56  |       |       | 1,318 |        |        
|                    | Denver, Colorado            |                               | 1985                    |  | 138 |       |       | 1,730 |        |        
|                    | Lakewood, Colorado          |                               | 1987                    |  | 150 |       |       | 2,134 |        |        
|                    | Ft. Lauderdale, Florida     |                               | 1986                    |  | 122 |       |       | 2,383 |        |        
|                    | Jacksonville, Florida(2)    |                               | 1998                    |  | 118 |       |       | 2,510 |        |        
|                    | Indianapolis, Indiana       |                               | 1994                    |  | 131 |       |       | 2,842 |        |        
|                    | Bloomington, Minnesota      |                               | 1994                    |  | 135 |       |       | 2,878 |        |        
|                    | Minnetonka, Minnesota       |                               | 1990                    |  | 127 |       |       | 2,295 |        |        
|                    | Hattiesburg, Mississippi    |                               | 1988                    |  | 154 |       |       | 2,206 |        |        
|                    | Lincoln, Nebraska           |                               | 1983                    |  | 111 |       |       | 1,796 |        |        
|                    | Omaha, Nebraska             |                               | 1985                    |  | 129 |       |       | 2,103 |        |        
|                    | Oklahoma City, Oklahoma     |                               | 1986                    |  | 134 |       |       | 2,242 |        |        
|                    | Tulsa, Oklahoma             |                               | 1986                    |  | 148 |       |       | 2,157 |        |        
|                    | Memphis, Tennessee          |                               | 1992                    |  | 120 |       |       | 1,961 |        |        
|                    | Laredo, Texas               |                               | 1995                    |  | 120 |       |       | 3,002 |        |        
|                    | Houston, Texas              |                               | 1996                    |  | 119 |       |       | 2,157 |        |        
|Holiday Inn Express |                             |                               |                         |  |     |       |       |       |        |        
|                    | Arlington Heights, Illinois |                               | 1989                    |  | 125 |       | $     | 2,214 |        | $      
|                    | Downers Grove, Illinois     |                               | 1984                    |  | 123 |       |       | 2,226 |        |        
|                    | Bloomington, Minnesota      |                               | 1987                    |  | 142 |       |       | 3,067 |        |        
|                    | Austin, Texas               |                               | 1992                    |  | 125 |       |       | 2,059 |        |        
|                    | Wauwatosa, Wisconsin        |                               | 1984                    |  | 122 |       |       | 2,163 |        |        
|                    |                             |                               |                         |  |     |       |       |       |       
|                    |                             | Limited Service Total/Average |                         |  |     | 3,189 |       |       | 55,625 |        
|                    |                             |                               |                         |  |     |       |       |       |       
|                    |                             |                               | Portfolio Total/Average |  |     |       | 8,424 |       | $      | 199,017
|                    |                             |                               |                         |  |     |       |       |       |       

---

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

Not applicable.

18

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PART II

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

The
Company's Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "RFS". 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 dividends declared per share:

Stock Price

Dividend DeclaredHigh

Low

Per Share2001First Quarter

$
14.94

$
12.81

$
0.385Second Quarter


15.80


13.82


0.385Third Quarter


15.79


8.50


0.385Fourth Quarter


11.75


9.00


0.100




High

Low

Per Share2000First Quarter

$
11.94

$
10.25

$
0.385Second Quarter


12.38


9.81


0.385Third Quarter


13.63


12.00


0.385Fourth Quarter


13.38


11.63


0.385


The
number of holders of record of shares of Common Stock was 26,395,377 as of March 14, 2002.

The
Company has adopted a policy of paying regular quarterly distributions on its Common Stock, and cash distributions have been paid on the Company's Common Stock each quarter since its
inception.

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 following table characterizes distributions paid per common share for the years ended December 31,
2001, 2000 and 1999:

2001

2000

1999$

%

$

%

$

%Ordinary income

$
1.13

89.8
%
$
1.43

92.8
%
$
1.54

100
%Return of capital


0.09

6.7
%

0.02

1.3
%Capital gains







0.01

0.3
%Unrecaptured Section 1250 gain


0.04

3.5
%

0.08

5.6
%$
1.26

100
%
$
1.54

100
%
$
1.54

100
%


Item 6.Selected Financial Data

The following tables set forth selected historical financial data for the Company that has been derived from the financial statements of the Company and the notes
thereto. Such data should be read

19

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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)

|                                                                                            |  | 2001 |         | 2000 |   | 1999    |   | 1998 |         | 1997 |  
|------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | -
|Operating Data (1):                                                                         |  |      |         |      |   |         |   |      |         |      |  
|Total revenue                                                                               |  | $    | 221,878 |      | $ | 107,359 |   | $    | 99,662  |      | $
|Net income (loss)                                                                           |  |      | (13,729 | )    |   | 30,790  |   |      | 34,990  |      |  
|Net income (loss) applicable to common shareholders                                         |  |      | (11,713 | )    |   | 29,378  |   |      | 33,578  |      |  
|Diluted earnings (loss) per share                                                           |  |      | (0.47   | )    |   | 1.20    |   |      | 1.34    |      |  
|Balance Sheet Data:                                                                         |  |      |         |      |   |         |   |      |         |      |  
|Investment in hotel properties, net                                                         |  |      | 615,562 |      |   | 635,997 |   |      | 651,988 |      |  
|Total assets                                                                                |  |      | 668,862 |      |   | 673,467 |   |      | 687,242 |      |  
|Total debt                                                                                  |  |      | 301,135 |      |   | 277,431 |   |      | 282,278 |      |  
|Shareholders' equity                                                                        |  |      | 290,811 |      |   | 348,454 |   |      | 361,283 |      |  
|Cash Flows Data:                                                                            |  |      |         |      |   |         |   |      |         |      |  
|Cash provided by operating activities                                                       |  |      | 10,466  |      |   | 65,223  |   |      | 66,884  |      |  
|Cash used by investing activities                                                           |  |      | (8,642  | )    |   | (10,843 | ) |      | (26,580 | )    |  
|Cash provided (used) by financing activities                                                |  |      | 230     |      |   | (56,612 | ) |      | (36,405 | )    |  
|Other Data (unaudited):                                                                     |  |      |         |      |   |         |   |      |         |      |  
|Recurring funds from operations (2)                                                         |  |      | 51,229  |      |   | 64,170  |   |      | 63,010  |      |  
|Weighted average common shares, partnership units and potential dilutive shares outstanding |  |      | 27,655  |      |   | 27,127  |   |      | 27,569  |      |  
|EBITDA                                                                                      |  |      | 81,800  |      |   | 90,308  |   |      | 86,116  |      |  
|Ratio of EBITDA to interest expense                                                         |  |      | 3.3x    |      |   | 3.9x    |   |      | 4.4x    |      |  
|Ratio of Debt to EBITDA                                                                     |  |      | 3.7x    |      |   | 3.1x    |   |      | 3.3x    |      |  
|Dividends paid per share                                                                    |  |      | 1.255   |      |   | 1.54    |   |      | 1.54    |      |  

20

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QUARTERLY RESULTS OF OPERATIONS
(In thousands, except per share and ratio amounts)

|            |                                                                                             | First Quarter |   | Second Quarter |   | Third Quarter |        | Fourth Quarter |   | Total  | 
|----------- | ------------------------------------------------------------------------------------------- | ------------- | - | -------------- | - | ------------- | ------ | -------------- | - | ------ | 
|2001: (1)   |                                                                                             |               |   |                |   |               |        |                |   |        | 
|            | Operating Data:                                                                             |               |   |                |   |               |        |                |   |        | 
|            | Total revenue                                                                               |               | $ | 57,904         |   | $             | 60,415 |                | $ | 55,505 | 
|            | 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  | 
|2000: (1)   |                                                                                             |               |   |                |   |               |        |                |   |        | 
|            | Operating Data:                                                                             |               |   |                |   |               |        |                |   |        | 
|            | Total revenue (4)                                                                           |               | $ | 11,398         |   | $             | 14,502 |                | $ | 38,771 | 
|            | Net income (loss)                                                                           |               |   | (5,246         | ) |               | (6,108 | )              |   | 19,088 | 
|            | Net income (loss) applicable to common shareholders                                         |               |   | (5,594         | ) |               | (6,459 | )              |   | 18,733 | 
|            | Diluted earnings (loss) per share                                                           |               |   | (0.23          | ) |               | (0.26  | )              |   | 0.75   | 
|Other Data: |                                                                                             |               |   |                |   |               |        |                |   |        | 
|            | Recurring funds from operations                                                             |               |   | 14,183         |   |               | 17,504 |                |   | 18,999 | 
|            | Weighted average common shares, partnership units and potential dilutive shares outstanding |               |   | 27,305         |   |               | 27,052 |                |   | 27,100 | 
|            | Dividends paid per share                                                                    |               |   | 0.385          |   |               | 0.385  |                |   | 0.385  | 

---

21

---



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

The Company

General

At December 31, 2001, the Company owned interests in 58 Hotels with 8,424 rooms located in 24 states and an approximate 91% interest in the Operating
Partnership.

In
2001, the Company received 42% of its EBITDA from full service hotels, 33% from extended stay hotels and 25% from limited service hotels. The Company received 65% of its EBITDA in
five states: California (37%), Florida (10%), Texas (7%), Michigan (6%) and Illinois (5%).

The
following summarizes additional information for the 58 hotels owned at December 31, 2001:

Franchise Affiliation

Hotel
Properties

Rooms/Suites

2001 EBITDA(1)
(In thousands)Full Service Hotels:Sheraton

4

864

$
10,749Holiday Inn

5

954


8,359Independent

2

331


4,771Four Points by Sheraton

2

412


4,673Hilton

1

234


3,418Doubletree

1

221


2,45415

3,016


34,424Extended Stay Hotels:Residence Inn by Marriott

14

1,851


24,015TownePlace Suites by Marriott

3

285


2,231Homewood Suites by Hilton

1

83


52118

2,219


26,767Limited Service Hotels:Hampton Inn(1)

17

2,113


13,621Holiday Inn Express

5

637


4,363Courtyard by Marriott

1

102


1,134Comfort Inn(1)

2

337


1,09625

3,189


20,214Total

58

8,424

$
81,405


---

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

2001

2000

1999Hotels owned at beginning of years

60

62

60Acquisitions and developed hotels placed into service





2Sales of hotels

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

58

60

62


22

---

At
December 31, 2001, the Company leased five hotels to two third-party lessees. Fifty-one hotels are managed by 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 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:



All
of the hotels continue to operate under the same franchise affiliation as prior to the contract termination.

Effective
January 1, 2001, the TRS Lessees entered into new management contracts with Flagstone. Flagstone is a recently formed company owned by MeriStar 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:



Results of Operations



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

23

---

TRS Lessees. The Company subsequently sold two hotels. As a result of these transactions, the TRS lessees now lease 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.

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 the reporting of 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.

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 as a result of 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

24

---

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 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. The pro forma results of
operations for the year ended December 31, 2000 assumes that the following occurred on January 1, 2000:



25

---



RFS Hotel Investors, Inc.
Consolidated Statement of Operations
For the Years Ended December 31, 2001 and 2000
(In thousands)

|                                                                                        |                                                             | 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 | )              | $      
|                                                                                        |                                                             |                          |         |                |        

26

---

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 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.

27

---

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 |      | RevPAR |     
|--------------- |  | --- | ------ | --------- | ---- | ------ | ----
|
|Full Service    |  | $   | 108.52 |           | (2.0 | )%     | 67.9
|Extended Stay   |  |     | 96.55  |           | 2.0  | %      | 78.5
|Limited Service |  |     | 70.91  |           | 1.8  | %      | 67.4
|Total           |  | $   | 90.50  |           | (0.1 | )%     | 70.7

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 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

28

---

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 guest 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 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

29

---

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.



Revenues

Lease revenue increased 7.7% in 2000 over 1999 due primarily to an increase in RevPAR at the 55 comparable hotels of 5.5% and lease revenue associated with a
40-room addition to the Beverly
Heritage hotel in Milpitas, California completed in November 1999. At December 31, 2000, we owned interests in 60 hotels with 8,689 rooms located in 24 states.

The
following shows hotel operating statistics for the 55 comparable hotels for the year ended December 31, 2000. Excluded are three hotels opened in 1999, and two hotels that
underwent renovations in 1999 and 2000 (Ramada Plaza in the Fisherman's Wharf district of San Francisco, California converted to a Hilton full service hotel in the second quarter 2000 and the Sheraton
Hotel in Birmingham, Alabama):

Comparable Hotels Operating Statistics
For the Year Ended December 31, 2000 and 1999

|                |       | Lease Revenue |        | ADR    |      | Occupancy |   | RevPAR |      
|--------------- | ----- | ------------- | ------ | ------ | ---- | --------- | - | ------ | -----
|
|
|Full Service    |       | $             | 40,349 |        | 15.1 | %         | $ | 110.75 |      
|Extended Stay   |       |               | 27,347 |        | 4.9  | %         | $ | 98.49  |      
|Limited Service |       |               | 28,132 |        | 0.9  | %         | $ | 69.55  |      
|                | Total |               | $      | 95,828 |      | 7.6       | % | $      | 90.82

Increases
in RevPAR for all market segments in 2000 exceeded those of 1999 with the full service hotels leading the way.

30

---

Full Service Hotels.Full service hotels comprised approximately 42% of comparable lease revenues in 2000. The full service
hotels produced an average RevPAR increase of 10.3% in 2000 versus 3.8% in 1999. This 10.3% RevPAR increase was achieved through a 2.0 percentage point increase in occupancy and a 7.3% increase
in ADR. The following four full service hotels, located in Silicon Valley, had RevPAR increases averaging 14.8% in 2000:

Hotel

Location

Increase in RevPAR173-room Sheraton

Sunnyvale, CA

18.2
%214-room Four Points by Sheraton

Pleasanton, CA

17.5
%229-room Sheraton

Milpitas, CA

14.7
%214-room Beverly Heritage

Milpitas, CA

8.8
%


The
Sunnyvale hotel was renovated and converted from a Four Points by Sheraton in December 1998. Since conversion, the hotel has posted strong results with occupancy increasing
6.7 points to 81.7% and ADR increasing 8.5% to $162.64.

The
Four Points by Sheraton in Pleasanton has rebounded from the loss of a major account in 1999 with occupancy increasing 7.2 points to 76.2% and ADR increasing 6.4% to $114.52.

The
Beverly Heritage's RevPAR is attributable to an increase in occupancy of 1.5 points to 76.1% in spite of a 40-room addition in November 1999 combined with an
increase in ADR of 6.6% to $141.89.

In
addition to the Silicon Valley full service hotels, the following two hotels benefited from recent renovations and/or re-brandings:

The
Hilton San Francisco Fisherman's Wharf, which was converted from a Ramada Plaza in April 2000 after an $11 million dollar renovation, operated at occupancy of 75.4%,
and ADR of $178.24 in the fourth quarter of 2000.

The
255-room Sheraton Hotel in Clayton, Missouri, a suburb of St. Louis, produced a RevPAR gain of 16.1% in 2000. This Sheraton was converted from a Holiday Inn in
August 1999. For the year, occupancy increased 6.4 points to 68.5% and ADR increased 5.3% to $100.38.

Other
full service hotels include the 94-room Hotel Rex in San Francisco's Union Square that produced a RevPAR increase of 17.4% in 2000 driven by an occupancy increase of
3.7 points to 80.0% and an ADR increase of 11.9% to $175.58. The five Holiday Inns, which have an average of 190 rooms per hotel, produced an increase in RevPAR of 1.1% in 2000. The Holiday Inn at
Crystal Lake, Illinois (a suburb of Chicago) had been hit by significant supply increases over the last 18 months, as over 400 primarily limited service rooms have opened in its primary and
secondary market area. Group business at this hotel remains strong, but transient business has been reduced in that market. The rest of the Holiday Inns are primarily located in competitive secondary
markets that generally do not allow us the opportunity to aggressively increase rate or occupancy.

Extended Stay Hotels.Extended stay hotels comprised approximately 29% of comparable lease revenues in 2000. The extended
stay hotels experienced an increase in RevPAR of 4.0% in 2000. Fourteen of the 18 extended stay properties are Residence Inns by Marriott and produced an increase in RevPAR of 3.8%, occupancy of 0.7
points to 82.7% and ADR of 2.9% to $98.89.

Limited Service Hotels.Limited service hotels comprised approximately 29% of comparable lease revenues in 2000. The limited
service hotels experienced an increase in RevPAR of 1.0% in 2000 versus

31

---

a decrease of 1.9% in 1999. Nineteen of the 27 limited service hotels are Hampton Inns and produced increased RevPAR of 1.7% through an increase in occupancy of 1.3 points.

Expenses

As a percentage of total revenue, expenses, before the loss on sale of hotel properties and franchise termination fees, increased to 67% in 2000 from 63% in 1999.

Taxes
and insurance expense represented 10% of lease revenues for 2000 and 1999. The decrease in real estate taxes from the sale of two hotels in the fourth quarter was offset by
increases in the taxing authorities' reassessments on renovations at some of our properties.

Depreciation
increased 12.3% due to increases in depreciable assets related to two hotels opened in 1999 and substantial renovations at the Hilton San Francisco Fisherman's Wharf and the
Sheraton Birmingham.

General
and administrative expenses increased $2.6 million in 2000 to 5.9% of lease revenues in 2000 from 3.7% in 1999. Increases in general and administrative expenses were due
to increases in
compensation from incentive bonuses and additional personnel, other expenses in response to initiatives associated with the REIT Modernization Act, and to Centrafuse, our application service provider
of hotel accounting solutions.

Interest
expense increased $3.2 million in 2000 due to a weighted average increase in borrowings during the year of approximately $19 million and an increase in borrowing
costs due to a general increase in interest rates that impacted our variable rate debt. Borrowings increased primarily due to funding of renovation costs. At December 31, 2000, variable rate
debt was 4% of total debt, a reduction from 35% a year ago. From 1998 through 2000, we spent $75 million or approximately 12% of gross hotel revenues renovating, expanding and
re-branding our hotels.

The
loss on the sale of hotel properties and franchise termination fees of $4.4 million represents a reserve of $4.0 million established against notes receivable from prior
years hotel sales and a loss of approximately $1.0 million on the sale of the Hampton Inn in Plano, Texas offset by gains on the sale of two hotels, the Hawthorne Suites in Atlanta, Georgia and
the Hampton Inn in Warren, Michigan, aggregating approximately $0.7 million.

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
gains (losses) from debt restructuring which will be extraordinary items in accordance with GAAP and 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 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.

32

---

The
following details the computation of recurring FFO (in thousands except per share amounts):

2001

2000

1999Net income (loss)

$
(13,729
)
$
30,790

$
34,990Minority interest in Operating Partnership


(1,157
)

3,218


3,620Depreciation


29,605


27,198


24,210Hilton lease termination, net of deferred income taxes


40,762(Gain) loss on sale of hotel properties


(1,127
)

4,376


1,602Preferred stock dividends


(3,125
)

(1,412
)

(1,412
)Recurring FFO

$
51,229

$
64,170

$
63,010Weighted average common shares, partnerships units and potential dilutive shares outstanding


27,655


27,127


27,569


The
following details the computation of EBITDA (in thousands):

2001

2000

1999Recurring FFO

$
51,229

$
64,170

$
63,010Interest expense


26,042


23,016


19,623Amortization


1,384


1,710


2,071Current income taxes


20Preferred stock dividends


3,125


1,412


1,412EBITDA

$
81,800

$
90,308

$
86,116


Liquidity and Capital Resources

The Company's principal source of cash 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, 2001, cash flow provided by operating activities was $10.5 million The Company believes that its cash provided by
operating activities will be adequate to meet some of its liquidity needs. 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 if market conditions permit. At December 31, 2001, the Company had $5.7 million of cash and cash
equivalents and had borrowed $81.2 million under its $140.0 million Line of Credit, subject to Borrowing Base Values, as calculated in accordance with the terms of the Line of Credit,
which value may be less than the $140 million Line of Credit facility.

33

---



The Company has included in this discussion of liquidity and capital resources the "as adjusted" effects on the Company resulting from the following transactions that occurred subsequent
to December 31, 2001:



The
following details the Company's debt outstanding at December 31, 2001 (dollar amounts in thousands) on an actual and as adjusted basis:

|                            |  | Actual
Balance |         | As Adjusted
Balance |   | Interest Rate |  | Maturity         |   | # of
Hotels |  | Net Book
Value at
December 31, 2001
Collateral | 
|--------------------------- |  | -------------- | ------- | ------------------- | - | ------------- |  | ---------------- | - | ----------- |  | ---------------------------------------------- | 
|Line of Credit              |  | $              | 81,188  |                     | $ | 13,414        |  | LIBOR + 200bp(a) |   | Variable    |  | July 2004                                      | 
|1996 Mortgage Debt, Class A |  |                | 33,181  |                     |   |              |  | 6.83             | % | Fixed       |  | August 2008                                    | 
|1996 Mortgage Debt, Class B |  |                | 25,000  |                     |   |              |  | 7.30             | % | Fixed       |  | November 2011                                  | 
|Mortgage Debt               |  |                | 92,087  |                     |   | 92,087        |  | 7.83             | % | Fixed       |  | December 2008                                  | 
|Mortgage Debt               |  |                | 18,271  |                     |   | 18,271        |  | 8.22             | % | Fixed       |  | November 2007                                  | 
|Mortgage Debt               |  |                | 51,408  |                     |   | 51,408        |  | 8.00             | % | Fixed       |  | August 2010                                    | 
|Notes                       |  |                |        |                     |   | 125,000       |  | 9.75             | % | Fixed       |  | March 2012                                     | 
|                            |  |                |         |                     |   |               |  |                  |   |             |  |                                                | 
|                            |  | $              | 301,135 |                     | $ | 300,180       |  |                  |   |             |  |                                                | 
|                            |  |                |         |                     |   |               |  |                  |   |             |  |                                                | 

---

The
interest rate on the line of credit ranges from 150 basis points to 250 basis points above LIBOR, depending on the Company's ratio of total debt to investment in hotel properties (as
defined). The average interest rate on the line of credit (including the impact of the interest rate swaps) was approximately 7.9% for the year ended December 31, 2001. 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 it 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, 2001.

The
Company participates in two interest rate swap agreements. One of the interest rate swap agreements is for a notional amount of $30 million maturing in July 2003. Under
this interest rate swap agreement, the Company receives payments based on the one month LIBOR rate of 2.14% and pays a

34

---

fixed rate of 4.775% at December 31, 2001. In addition, the Company participates in a second interest rate swap agreement for a notional amount of $40 million maturing in
July 2003. Under the second interest rate swap agreement, the Company receives payment based on the one-month LIBOR rate of 2.14% and pays a fixed rate of 6.535% at
December 31, 2001. In connection with the repayment of a portion of our line of credit using proceeds from the issuance of the outstanding notes, we terminated these agreements at an aggregate
approximate cost of $3.2 million.

The
Company's other borrowings are nonrecourse to the Company and contain provisions allowing for the substitution of collateral, upon satisfaction of certain conditions, after the
respective loans have been outstanding for approximately four years. Most of the mortgage borrowings are repayable, subject to various prepayment penalties and yield maintenance or defeasance
obligations. At December 31, 2001, approximately 96% of the Company's debt was fixed at an average interest rate of 7.7%. On an as adjusted basis, at December 31, 2001 approximately 96%
of our debt was fixed at an average interest rate of 8.7%.

Future
scheduled principal payments of debt obligations on an actual and as adjusted basis at December 31, 2001, are as follows (in thousands):

Actual

As Adjusted2002

$
6,547

$
2,4872003


7,044


2,6952004


88,735
(1)

16,301
(1)2005


8,152


3,1612006


8,772


3,424Thereafter


181,885


272,112$
301,135

$
300,180


---

In
addition to the above principal payment of debt obligations, as of December 31, 2001, the Company had a $0.6 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. On January 1, 2002, the letter of credit was increased to
$2.0 million. 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 material.

On
January 2, 2001, RFS Hotel Investors, Inc. issued 250,000 shares of non-convertible mandatorily redeemable Series B Preferred Stock with an aggregate
liquidation preference of $25 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% of the liquidation preference of the shares. If not repaid, beginning January 1, 2006, the dividend rate increases 2.0% per annum up to a maximum rate of 20.5%. RFS may redeem shares of
the Series B Preferred Stock in whole but not in part, on or after December 31, 2003 for $25 million. If the shares are redeemed before December 31, 2003, the redemption
price is at varying
premiums over the liquidation preference. The shares are mandatorily redeemable upon a change of control, dissolution, or winding up or on our failure to qualify as a REIT.

35

---

Certain
significant credit statistics at December 31, 2000 and 2001 and, on an as adjusted basis, for the year ended December 31, 2001, are as follows:

Credit Statistic

December 31, 2000

December 31, 2001

As Adjusted
Year Ended
December 31, 2001EBITDA to interest expense(1)

3.9x

3.3x

3.0xTotal debt to EBITDA

3.1x

3.7x

3.7xWeighted average maturity of fixed rate debt

8.4 years

7.3 years

8.4 yearsRatio of fixed interest rate debt to total debt

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

38
%
38
%
37
%


---

For
the years ended December 31, 2000 and 2001, the Company spent $32.6 million and $18.0 million, respectively, on capital improvements to its hotels. The Company
expects to spend approximately $9.0 million on capital improvements to its hotels during 2002, which the Operating Partnership is expected to fund from cash generated from operations and
borrowings under the line of credit.

Over
the next 12 months, 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. At December 31, 2001, the Company had $30.2 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 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 income, to the extent that working capital and cash flow from its investments are insufficient to make such distributions.

In
the future the Company 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 it may incur, the board of directors has adopted a current policy limiting the amount of indebtedness to an amount not in excess of
approximately 45% of the Company's investment in hotel properties, at cost (as defined). The board may change the debt policy at any time without shareholder approval.

36

---

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.

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

Our discussion and analysis of our financial condition and results of operations are based upon our 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 us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements.

On
an on-going basis, we evaluate our estimates, including those related to bad debts, carrying value of investments in hotels, income taxes, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions that we believe 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.

We
maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

We
record an impairment charge when we believe an investment in hotels has been impaired such that future undiscounted cash flows would not recover the book basis of the investment 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.

We
record a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized. While we have considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future
in excess of their net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, including, without limitation,
statements containing the words

37

---

"believes," "anticipates," "expects" and words of similar import. Such forward-looking statements relate to future events and 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 to be materially different from the results or achievements expressed or
implied by such forward-looking statements. The Company is not obligated to update any such factors or to reflect the impact of actual future events or developments on such forward-looking statements.

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 its 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 the line of credit. If interest rates increased by 25 basis points, its
annual interest expense would have increased by approximately $68 thousand, based on balances outstanding during the year ending December 31, 2001.

The
Company's primary market risk exposure is to changes in interest rate as a result of its Line of Credit and long-term debt. At December 31, 2001, the Company had
outstanding total indebtedness of approximately $300.2 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 rate debt
instruments to the extent that reasonably favorable rates are obtainable with such arrangements and derivative financial instruments such as interest rate swaps, to effectively lock the interest rate
on a portion of its variable debt. The Company does not enter into derivative or interest rate transactions for speculative purposes. Approximately 96% of the Company's outstanding debt was subject to
fixed rates with a weighted average interest rate of 7.7% at December 31, 2001. The Company participates in two interest rate swap agreements. One of the interest rate swap agreements is for a
notional amount of $30 million maturing in July 2003. Under this interest rate swap agreement, the Company received payments based on the one month LIBOR rate of 2.14% and pays a fixed
rate of 4.775% at December 31, 2001. In addition, the Company participates in a second interest rate swap agreement for a notional amount of $40 million maturing in July 2003.
Under the second interest rate swap agreement, the Company receives payments based on the one-month LIBOR rate of 2.14% and pays a fixed rate of 6.535% at December 31, 2001. The
Company regularly reviews interest rate exposure on its outstanding borrowings in an effort to minimize the risk of interest rate fluctuations. In connection with the issuance of the outstanding
senior notes and pay down of the outstanding balance on the line of credit, the Company terminated these interest rate swap agreements at an aggregate cost of approximately $3.2 million.

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, 2001,
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, 2001. For the interest rate swaps, the table presents notional amounts and weighted average interest rates by expected contractual maturity dates. In connection with the
issuance of the notes, the interest rate swaps were terminated at a cost of approximately $3.2 million. 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 December 31, 2001. The rate assumed in the fair value calculation of fixed rate debt is equal
to 6.66% which consists of the 7-year treasury of 4.66% as December 31, 2001 plus 200 basis points.

38

---

Expected Principal Cash Flows
(In thousands)

|Liabilities                |                   | 2002                    |   | 2003  |      | 2004 |        | 2005 |   | 2006   |      | Thereafter |       | Total |   | Fair
Value
Total |     
|-------------------------- | ----------------- | ----------------------- | - | ----- | ---- | ---- | ------ | ---- | - | ------ | ---- | ---------- | ----- | ----- | - | ---------------- | ----
|Long-Term Debt:            |                   |                         |   |       |      |      |        |      |   |        |      |            |       |       |   |                  |     
|                           | Fixed Rate        |                         | $ | 6,547 |      | $    | 7,044  |      | $ | 77,547 |      | $          | 8,152 |       | $ | 8,772            |     
|                           |                   | Average Interest Rate   |   |       | 7.71 | %    |        | 7.71 | % |        | 7.69 | %          |       | 7.69  | % |                  | 7.69
|                           | Variable Rate     |                         |   |       |      |      |        |      | $ | 11,188 |      |            |       |       |   |                  |     
|                           |                   | Average Interest Rate   |   |       |      |      |        |      |   |        | 4.03 | %          |       |       |   |                  |     
|Interest Rate Derivatives: |                   |                         |   |       |      |      |        |      |   |        |      |            |       |       |   |                  |     
|                           | Variable to Fixed |                         |   |       |      | $    | 70,000 |      |   |        |      |            |       |       |   |                  |     
|                           |                   | Average Pay Rate(1)     |   |       | 5.78 | %    |        | 5.78 | % |        |      |            |       |       |   |                  |     
|                           |                   | Average Receive Rate(1) |   |       | 2.32 | %    |        | 4.16 | % |        |      |            |       |       |   |                  |     

---

The
table incorporates only those exposures that exist as of December 31, 2001 and does not consider exposures or positions which 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 will 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 Included herein beginning at page F-1.

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

None.

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 Company's Proxy Statement for the 2002 Annual Meeting of Shareholders.

Item 11. Executive Compensation

Information about executive compensation is incorporated herein by reference to the discussion under "Executive Compensation Tables" in the Company's Proxy
Statement for the 2002 Annual Meeting of Shareholders.

Item 12.Security Ownership of Certain Beneficial Owners and Management

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 Company's Proxy Statement for the 2002 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 Company's Proxy Statement for the 2002 Annual Meeting of Shareholders.

39

---



PART IV

Item 14. 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:

Report
of Independent Accountants



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.

(b) Reports on Form 8-K



40

---



(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 15, 2002, 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 15, 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 15, 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 15, 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 15, 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 15, 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 15, 2002, and incorporated herein by reference).
|               |  |                                                                                                                                                                                                                                                                                                                    

41

---

|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 15, 2002, and
incorporated herein by reference).                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 15, 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 15, 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).                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                

42

---

|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).                                                                                                                                
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.)
|12.1  |  | Statements regarding Computation of Ratios (previously filed as Exhibit 12.1 to RFS's form S-4 Registration Statement dated March 15, 2002, and incorporated herein by reference).                                                                                                                                          
|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 15, 2002, and incorporated herein by reference).                                                                                                                                          
|*23.1 |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                                                       

---

43

---

SIGNATURES

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

|                     |  | RFS HOTEL INVESTORS, INC.
|-------------------- |  | -------------------------
|                     |  | By:                      
|                     |  |                          
|                     |  |                          
|Date: March 15, 2002 |  |                          

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated:

|SIGNATURE                                       |  | TITLE                                                                                             |  | DATE          
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------
|                                                |  |                                                                                                   |  |               
|/s/ROBERT M. SOLMSONRobert M. Solmson           |  | Chairman of the Board, Chief Executive Officer and President                                      |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/RANDALL L. CHURCHEYRandall L. Churchey       |  | President and Chief Operating Officer and Director                                                |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/KEVIN M. LUEBBERSKevin M. Luebbers           |  | Executive Vice President and Chief Financial Officer (principal financial and accounting officer) |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/KEVIN M. LUEBBERSKevin M. Luebbers           |  | Executive Vice President and Chief Financial Officer (principal financial and accounting officer) |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/DENNIS M. CRAVENDennis M. Craven             |  | Vice President and Chief Accounting Officer                                                       |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/H. LANCE FORSDICKH. Lance Forsdick, Sr.      |  | Director                                                                                          |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/BRUCE E. CAMPBELL, JR.Bruce E. Campbell, Jr. |  | Director                                                                                          |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/MICHAEL E. STARNESMichael E. Starnes         |  | Director                                                                                          |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/JOHN W. STOKES, JR.John W. Stokes, Jr.       |  | Director                                                                                          |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/R. LEE JENKINSR. Lee Jenkins                 |  | Director                                                                                          |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/RICHARD REISS, JR.Richard Reiss, Jr.         |  | Director                                                                                          |  | March 15, 2002
|                                                |  |                                                                                                   |  |               
|/s/KARL MATTHIESKarl Matthies                   |  | Director                                                                                          |  | March 15, 2002

44

---

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, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of RFS Hotel Investors, Inc. (the "Company") at December 31, 2001 and 2000, 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 Company's
management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with 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 Company adopted the provisions of Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities."

PricewaterhouseCoopers
LLP
Dallas, Texas
February 7, 2002, except for Note 10, as to
which the date is February 26, 2002

F-1

---

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

|                                                                                                                                                                         |                                                                                                                                      | December 31,
2001 |         | December 31,
2000 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------ | ----------------- | ------- | ----------------- | -
|ASSETS                                                                                                                                                                   |                                                                                                                                      |                   |         |                   |  
|Investment in hotel properties, net                                                                                                                                      |                                                                                                                                      | $                 | 615,562 |                   | $
|Cash and cash equivalents                                                                                                                                                |                                                                                                                                      |                   | 5,735   |                   |  
|Restricted cash                                                                                                                                                          |                                                                                                                                      |                   | 6,817   |                   |  
|Accounts receivable                                                                                                                                                      |                                                                                                                                      |                   | 5,533   |                   |  
|Deferred expenses, net                                                                                                                                                   |                                                                                                                                      |                   | 6,964   |                   |  
|Other assets                                                                                                                                                             |                                                                                                                                      |                   | 3,517   |                   |  
|Deferred income taxes                                                                                                                                                    |                                                                                                                                      |                   | 24,734  |                   |  
|                                                                                                                                                                         |                                                                                                                                      |                   |         |                   |  
|                                                                                                                                                                         | Total assets                                                                                                                         |                   | $       | 668,862           |  
|                                                                                                                                                                         |                                                                                                                                      |                   |         |                   |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                     |                                                                                                                                      |                   |         |                   |  
|Accounts payable and accrued expenses                                                                                                                                    |                                                                                                                                      | $                 | 20,857  |                   | $
|Borrowings on Line of Credit                                                                                                                                             |                                                                                                                                      |                   | 81,188  |                   |  
|Mortgage notes payable                                                                                                                                                   |                                                                                                                                      |                   | 219,947 |                   |  
|Minority interest in Operating Partnership, 2,458 and 2,562 units issued and outstanding at December 31, 2001 and 2000, respectively and other consolidated subsidiaries |                                                                                                                                      |                   | 31,059  |                   |  
|                                                                                                                                                                         |                                                                                                                                      |                   |         |                   |  
|                                                                                                                                                                         | Total liabilities                                                                                                                    |                   |         | 353,051           |  
|                                                                                                                                                                         |                                                                                                                                      |                   |         |                   |  
|Series B Preferred Stock, $0.01 par value, 5,000 shares authorized, 250 shares issued and outstanding                                                                    |                                                                                                                                      |                   | 25,000  |                   |  
|                                                                                                                                                                         |                                                                                                                                      |                   |         |                   |  
|Commitments and contingencies                                                                                                                                            |                                                                                                                                      |                   |         |                   |  
|Shareholders' equity:                                                                                                                                                    |                                                                                                                                      |                   |         |                   |  
|                                                                                                                                                                         | Series A Preferred Stock, $.01 par value, 5,000 shares authorized, 974 shares issued and outstanding at December 31, 2000            |                   |         |                   |  
|                                                                                                                                                                         | Common Stock, $.01 par value, 100,000 shares authorized, 25,811 and 25,088 shares issued at December 31, 2001 and 2000, respectively |                   |         | 258               |  
|Additional paid-in capital                                                                                                                                               |                                                                                                                                      |                   | 368,361 |                   |  
|Other comprehensive income                                                                                                                                               |                                                                                                                                      |                   | (3,220  | )                 |  
|Treasury stock, at cost, 576 shares                                                                                                                                      |                                                                                                                                      |                   | (8,100  | )                 |  
|Distributions in excess of earnings                                                                                                                                      |                                                                                                                                      |                   | (66,488 | )                 |  
|                                                                                                                                                                         |                                                                                                                                      |                   |         |                   |  
|                                                                                                                                                                         | Total shareholders' equity                                                                                                           |                   |         | 290,811           |  
|                                                                                                                                                                         |                                                                                                                                      |                   |         |                   |  
|                                                                                                                                                                         | Total liabilities and shareholders' equity                                                                                           |                   | $       | 668,862           |  
|                                                                                                                                                                         |                                                                                                                                      |                   |         |                   |  

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, 2001, 2000 and 1999
(In thousands, except per share data)

|                                                            |                                                             | 2001                     |         | 2000    |         | 1999   |        
|----------------------------------------------------------- | ----------------------------------------------------------- | ------------------------ | ------- | ------- | ------- | ------ | -------
|Revenue:                                                    |                                                             |                          |         |         |         |        |        
|                                                            | Rooms                                                       |                          | $       | 188,725 |         |        |        
|                                                            | Food and beverage                                           |                          |         | 17,695  |         |        |        
|                                                            | Other operating departments                                 |                          |         | 9,103   |         |        |        
|                                                            | Lease revenue                                               |                          |         | 5,782   |         | $      | 106,574
|                                                            | Other                                                       |                          |         | 573     |         |        | 785    
|                                                            |                                                             |                          |         |         |         |        |        
|                                                            |                                                             | 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  |         |        | 10,747 
|                                                            | Franchise costs                                             |                          |         | 17,007  |         |        |        
|                                                            | Maintenance and repair                                      |                          |         | 9,741   |         |        |        
|                                                            | Management fees                                             |                          |         | 5,762   |         |        |        
|                                                            | Depreciation                                                |                          |         | 29,605  |         |        | 27,198 
|                                                            | Lease termination                                           |                          |         | 65,496  |         |        |        
|                                                            | Amortization of deferred expenses and unearned compensation |                          |         | 1,384   |         |        | 674    
|                                                            | General and administrative                                  |                          |         | 19,436  |         |        | 6,304  
|                                                            |                                                             |                          |         |         |         |        |        
|                                                            |                                                             | Total operating expenses |         |         | 236,563 |        |        
|                                                            |                                                             |                          |         |         |         |        |        
|Operating income (loss)                                     |                                                             |                          | (14,685 | )       |         | 62,436 |        
|                                                            | Interest expense                                            |                          |         | 26,042  |         |        | 24,052 
|                                                            |                                                             |                          |         |         |         |        |        
|Income (loss) before minority interest, (gain) loss on sale |                                                             |                          |         |         |         |        |        
|                                                            | of hotels, and income taxes                                 |                          |         | (40,727 | )       |        | 38,384 
|                                                            | Minority interests                                          |                          |         | (1,157  | )       |        | 3,218  
|                                                            | (Gain) loss on sale of hotel properties                     |                          |         | (1,127  | )       |        | 4,376  
|                                                            | Benefit from income taxes                                   |                          |         | (24,714 | )       |        |        
|                                                            |                                                             |                          |         |         |         |        |        
|Net income (loss)                                           |                                                             |                          | (13,729 | )       |         | 30,790 |        
|                                                            | Gain on redemption of Series A preferred Stock              |                          |         | 5,141   |         |        |        
|                                                            | Preferred stock dividends                                   |                          |         | (3,125  | )       |        | (1,412 
|                                                            |                                                             |                          |         |         |         |        |        
|Net income (loss) applicable to common shareholders         |                                                             | $                        | (11,713 | )       | $       | 29,378 |        
|                                                            |                                                             |                          |         |         |         |        |        
|Earnings (loss) per share  basic and diluted               |                                                             | $                        | (0.47   | )       | $       | 1.20   |        
|Weighted average common shares outstandingbasic            |                                                             |                          | 25,045  |         |         | 24,559 |        
|Weighted average common shares outstandingdiluted          |                                                             |                          | 25,045  |         |         | 24,580 |        

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, 2001, 2000 and 1999
(In thousands)

|                                                         |  | 2001 |         | 2000 |   | 1999  
|-------------------------------------------------------- |  | ---- | ------- | ---- | - | ------
|Net income (loss)                                        |  | $    | (13,729 | )    | $ | 30,790
|Unrealized holding losses arising on interest rate swaps |  |      | (3,220  | )    |   |       
|                                                         |  |      |         |      |   |       
|Comprehensive income (loss)                              |  | $    | (16,949 | )    | $ | 30,790
|                                                         |  |      |         |      |   |       

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, 2001, 2000 and 1999
(In thousands, except per share data)

|                                                               |  |   |     | Common Stock |        |  |   |     |  |   |         |   |   |        |  
|-------------------------------------------------------------- |  | - | --- | ------------ | ------ |  | - | --- |  | - | ------- | - | - | ------ | -
|
|Balances at December 31, 1998                                  |  | $ | 10  |              | 25,021 |  | $ | 251 |  | $ | 373,156 |   |   |        |  
|Purchase of treasury shares                                    |  |   |     |              |        |  |   |     |  |   | 205     |   |   |        |  
|Issuance of restricted common shares to officers and directors |  |   |     |              | 41     |  |   |     |  |   |         |   |   |        |  
|Distributions on common shares, ($1.54 per share)              |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Distributions on preferred shares, ($1.45 per share)           |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Amortization of unearned compensation                          |  |   |     |              |        |  |   |     |  |   | 726     |   |   |        |  
|Net income                                                     |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|                                                               |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Balances at December 31, 1999                                  |  | $ | 10  |              | 25,062 |  | $ | 251 |  | $ | 374,087 |   |   |        |  
|Purchase of treasury shares                                    |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Issuance of common shares                                      |  |   |     |              | 13     |  |   |     |  |   | 162     |   |   |        |  
|Issuance of restricted common shares to officers and directors |  |   |     |              | 13     |  |   |     |  |   |         |   |   |        |  
|Distributions on common shares, ($1.54 per share)              |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Distributions on preferred shares, ($1.54 per share)           |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Amortization of unearned compensation                          |  |   |     |              |        |  |   |     |  |   | 661     |   |   |        |  
|Net income                                                     |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|                                                               |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Balances at December 31, 2000                                  |  | $ | 10  |              | 25,088 |  | $ | 251 |  | $ | 374,910 |   |   |        |  
|Purchase of preferred shares                                   |  |   | (10 | )            |        |  |   |     |  |   | (12,990 | ) |   |        |  
|Issuance of common shares                                      |  |   |     |              | 453    |  |   | 4   |  |   | 5,112   |   |   |        |  
|Issuance of restricted common shares to officers and directors |  |   |     |              | 270    |  |   | 3   |  |   |         |   |   |        |  
|Distributions on common shares, ($1.255 per share)             |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Distributions on preferred shares, ($3.125 per Series B share) |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Unrealized holding losses arising on interest rate swaps       |  |   |     |              |        |  |   |     |  |   |         |   | $ | (3,220 | )
|Amortization of unearned compensation                          |  |   |     |              |        |  |   |     |  |   | 1,329   |   |   |        |  
|Net income (loss)                                              |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|                                                               |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  
|Balances at December 31, 2001                                  |  |   |     |              | 25,811 |  | $ | 258 |  | $ | 368,361 |   | $ | (3,220 | )
|                                                               |  |   |     |              |        |  |   |     |  |   |         |   |   |        |  

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, 2001, 2000 and 1999
(In thousands)

|                                                     |                                                                                          | 2001                                       |                                                  | 2000    |        | 1999    |        
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------ | ------- | ------ | ------- | -------
|Cash flows from operating activities:                |                                                                                          |                                            |                                                  |         |        |         |        
|                                                     | Net income (loss)                                                                        |                                            | $                                                | (13,729 | )      | $       | 30,790 
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                            |                                                  |         |        |         |        
|                                                     |                                                                                          | Depreciation and amortization              |                                                  |         | 32,343 |         |        
|                                                     |                                                                                          | Minority interest in Operating Partnership |                                                  |         | (1,157 | )       |        
|                                                     |                                                                                          | (Gain) loss on sale of hotel properties    |                                                  |         | (1,127 | )       |        
|                                                     |                                                                                          | Changes in assets and liabilities:         |                                                  |         |        |         |        
|                                                     |                                                                                          |                                            | Accounts receivable                              |         |        | 7,508   |        
|                                                     |                                                                                          |                                            | Other assets                                     |         |        | 5,432   |        
|                                                     |                                                                                          |                                            | Deferred income taxes                            |         |        | (24,734 | )      
|                                                     |                                                                                          |                                            | Accounts payable and accrued expenses            |         |        | 5,930   |        
|                                                     |                                                                                          |                                            |                                                  |         |        |         |        
|                                                     |                                                                                          |                                            | Net cash provided by operating activities        |         |        | 10,466  |        
|                                                     |                                                                                          |                                            |                                                  |         |        |         |        
|Cash flows from investing activities:                |                                                                                          |                                            |                                                  |         |        |         |        
|                                                     | Investment in hotel properties and hotels under development                              |                                            |                                                  | (18,013 | )      |         | (32,551
|                                                     | Cash paid for franchise fees                                                             |                                            |                                                  | (65     | )      |         |        
|                                                     | Restricted cash                                                                          |                                            |                                                  | (1,888  | )      |         | (379   
|                                                     | Proceeds from sale of hotel properties                                                   |                                            |                                                  | 11,324  |        |         | 22,087 
|                                                     |                                                                                          |                                            |                                                  |         |        |         |        
|                                                     |                                                                                          |                                            | Net cash used by investing activities            |         |        | (8,642  | )      
|                                                     |                                                                                          |                                            |                                                  |         |        |         |        
|Cash flows from financing activities:                |                                                                                          |                                            |                                                  |         |        |         |        
|                                                     | Purchase of treasury stock                                                               |                                            |                                                  |         |        |         | (4,444 
|                                                     | Proceeds from borrowings                                                                 |                                            |                                                  | 66,688  |        |         | 81,200 
|                                                     | Payments on debt                                                                         |                                            |                                                  | (42,984 | )      |         | (86,047
|                                                     | Redemption of preferred stock                                                            |                                            |                                                  | (13,000 | )      |         |        
|                                                     | Distributions to common and preferred shareholders                                       |                                            |                                                  | (34,142 | )      |         | (39,972
|                                                     | Distributions to limited partners                                                        |                                            |                                                  | (3,135  | )      |         | (3,988 
|                                                     | Redemption of units                                                                      |                                            |                                                  |         |        |         |        
|                                                     | Issuance of common and preferred stock, net of $1,060 issuance costs                     |                                            |                                                  | 28,439  |        |         | 162    
|                                                     | Loan fees paid                                                                           |                                            |                                                  | (1,636  | )      |         | (3,523 
|                                                     |                                                                                          |                                            |                                                  |         |        |         |        
|                                                     |                                                                                          |                                            | Net cash provided (used) by financing activities |         |        | 230     |        
|                                                     |                                                                                          |                                            |                                                  |         |        |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                          |                                            | 2,054                                            |         |        | (2,232  | )      
|Cash and cash equivalents at beginning of period     |                                                                                          |                                            | 3,681                                            |         |        | 5,913   |        
|                                                     |                                                                                          |                                            |                                                  |         |        |         |        
|Cash and cash equivalents at end of period           |                                                                                          | $                                          | 5,735                                            |         | $      | 3,681   |        
|                                                     |                                                                                          |                                            |                                                  |         |        |         |        
|Supplemental disclosure of cash flow information:    |                                                                                          |                                            |                                                  |         |        |         |        
|                                                     | Cash paid for interest                                                                   |                                            | $                                                | 24,403  |        | $       | 22,970 

Supplemental
disclosure of non-cash activities:

In
2001, the Company:



F-6

---



In
2000, the Company recorded a $0.1 million allocation to paid-in capital from minority interest.

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

F-7

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF RFS HOTEL INVESTORS, INC.

Note 1. Organization

RFS Hotel Investors, Inc. ("RFS" or the "Company") is a hotel real estate investment trust which, at December 31, 2001, owned interests in 58 hotels
with 8,424 rooms located in 24 states (collectively the "Hotels") through its approximate 91% equity interest in RFS Partnership L.P. (the "Operating Partnership"). RFS, the Operating Partnership, and
their subsidiaries are herein referred to, collectively, as the "Company".

The
following table provides a schedule of the hotels by brand at December 31, 2001:

Franchise Affiliation

Hotel Properties

Rooms/SuitesFull Service hotels:Sheraton

4

864Holiday Inn

5

954Independent

2

331Sheraton Four Points

2

412Hilton

1

234Doubletree

1

22115

3,016Extended Stay hotels:Residence Inn by Marriott

14

1,851TownePlace Suites by Marriott

3

285Homewood Suites by Hilton

1

8318

2,219Limited Service hotels:Hampton Inn

17

2,113Holiday Inn Express

5

637Comfort Inn

2

337Courtyard by Marriott

1

10225

3,189Total

58

8,424


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

2001

2000

1999Hotels owned at beginning of years

60

62

60Acquisitions and developed hotels placed into service

2Sales of hotels

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

58

60

62


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. The cancellation of these agreements entitles the TRS Lessees to retain the operating profits or losses from the
hotels,

F-8

---

which previously accrued to Hilton under these contracts and, in the opinion of management, gives the Company (i) more control over the daily operations of the hotels, (ii) the benefits
from any cost efficiencies or ancillary revenues generated at the hotels, and (iii) flexibility, in that the hotels are not encumbered by long term leases which are difficult to amend and
expensive to terminate. As a result of this transaction, the Company began reporting hotel revenues and expenses rather than lease revenue. All of the hotels continue to operate under the same
franchise affiliation as prior to the contract termination.

Simultaneous
with the termination of the leases, management contracts and related agreements, the TRS Lessees entered into new management contracts with Flagstone Hospitality Management
("Flagstone"). At December 31, 2001, Flagstone manages 51 of the Company's 58 hotels and the remaining seven hotels are managed by four other third-party management companies. Only five of the
Company's hotels are operated under long-term leases with third parties as of December 31, 2001.

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 Hilton for cash consideration
of $13.0 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 2001.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation.The consolidated financial statements include the accounts of RFS, the Operating Partnership and
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, mortgage loans payable and interest rate swap agreements. The fair values of these financial instruments other than the interest rate swap agreements and mortgage loans payable are
not materially different from their carrying or contract values. The fair value of the interest rate swaps are estimated based on quotes from the market makers of these instruments and represents the
estimated amounts the Company would expect to pay to terminate the agreements. Credit and market risk exposures are limited to the net interest differentials. The estimated unrealized net loss on
these instruments was approximately $3.2 million and $0.8 million at December 31, 2001 and 2000. The carrying values of the Company's borrowings are estimated to be below fair
value by approximately $11.5 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. The Company does not believe that there are any facts or circumstances indicating impairment of any of its investment in hotel properties.

F-9

---

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 interest method over the maturity period of the related debt. Accumulated amortization of
deferred expenses is $6.6 million and $5.0 million at December 31, 2001 and 2000, 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 Percentage Lease agreements. The lessees are in compliance with their rental obligations under
the Percentage Leases. For the years ended December 31, 2001 and 2000, five and fifty-six hotels were leased to third party lessees, respectively.

Income Taxes.The Company has elected to be treated as a REIT under Sections 856 to 860 of 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 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.

Basic and Diluted Earnings Per Share.Basic earnings per share is computed by dividing net income (loss) applicable to common
shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) applicable to common shareholders by
the weighted average number of common shares and equivalents outstanding during the period. Common share equivalents represent shares issuable upon exercise of options. For the year ended
December 31, 2001, the common share equivalents would be antidilutive, and accordingly are not assumed to be outstanding for the computation of diluted earnings per share. For the years ended
December 31, 2000, 1999, the Company's Series A Preferred Stock, if converted to common shares, would be antidilutive; accordingly, the Series A Preferred Stock is not assumed to
be converted in the computation of diluted earnings per share. In addition, the Series B Preferred Stock is non-convertible and accordingly, is not included in the computation of
diluted earning per share.

F-10

---

Derivatives.Effective January 1, 2001, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 138, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as
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 is included in "Accounts payable and accrued expenses" with the related unrealized loss
recorded in other comprehensive income within shareholders' equity. If LIBOR interest rates remain unchanged for the next twelve months, the Company estimates that interest expense will be
$2.5 million higher than if the Company had not entered into the swaps. 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). Derivatives are used primarily to fix the rate on debt based on
floating-rate indices. 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 and Operating Partnership
units and the current quarterly distribution is $0.25 per share or unit, declared on January 31, 2002. Additionally, the Company pays regular quarterly dividends on its Series B
Preferred Stock in accordance with its dividend requirements. The Company's ability to make distributions is dependent upon receipt of its quarterly distributions from the Operating Partnership.

F-11

---

Note 3. Investment in Hotel Properties

Investment in hotel properties consists of the following at December 31, 2001, and 2000, respectively (in thousands):

2001

2000Land

$
70,401

$
71,886Building and improvements


543,912


541,847Furniture and equipment


115,479


106,554Capital improvements program expenditures


16,422


19,245746,214


739,532Accumulated depreciation


(130,652
)

(103,535
)$
615,562

$
635,997


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

Note 4. Debt

The following details the Company's debt outstanding at December 31, 2001 and 2000 and the net book value of the collateral pledged against the debt at
December 31, 2001 (dollar amounts in thousands):

|                    |  |               |  |               |  | Collateral |   |   |         |  
|------------------- |  | ------------- |  | ------------- |  | ---------- | - | - | ------- | -
|
|Variable Rate Debt: |  |               |  |               |  |            |   |   |         |  
|Line of Credit      |  | LIBOR + 200bp |  | July 2004     |  | 24         |   | $ | 216,228 |  
|Fixed Rate Debt:    |  |               |  |               |  |            |   |   |         |  
|Line of Credit      |  | 6.54%         |  | July 2003     |  | (a         | ) |   | (a      | )
|Line of Credit      |  | 4.78%         |  | July 2003     |  | (a         | ) |   | (a      | )
|Mortgage            |  | 6.83%         |  | August 2008   |  | 15         |   |   | 143,522 |  
|Mortgage            |  | 7.30%         |  | November 2011 |  | (b         | ) |   | (b      | )
|Mortgage            |  | 7.83%         |  | December 2008 |  | 10         |   |   | 126,404 |  
|Mortgage            |  | 8.22%         |  | November 2007 |  | 1          |   |   | 44,421  |  
|Mortgage            |  | 4.50%         |  | January 2001  |  |            |   |   |         |  
|Mortgage            |  | 8.00%         |  | August 2010   |  | 8          |   |   | 84,987  |  
|                    |  |               |  |               |  |            |   |   |         |  
|                    |  |               |  |               |  |            |   | $ | 615,562 |  
|                    |  |               |  |               |  |            |   |   |         |  

---

The
interest rate on the $140 million Line of Credit that matures in July 2004 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 interest rate on the variable contracts of the Line of Credit outstanding at December 31, 2001 was
4.03%, calculated as the LIBOR interest rate of 2.03% plus 200 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 $111.4 million at December 31, 2001. The
Line of Credit contains various covenants including the maintenance of a minimum net

F-12

---

worth, minimum debt and interest coverage ratios, and total indebtedness and liability limitations. The Company was in compliance with these covenants at December 31, 2001.

The
Company participates in two interest rate swap agreements. One of the interest rate swap agreements is for a notional amount of $30 million maturing in July 2003. Under
this interest rate swap agreement, the Company receives payments based on the one month LIBOR rate of 2.14% and pays a fixed rate of 4.775% at December 31, 2001. In addition, the Company
participates in a second interest rate swap agreement for a notional amount of $40 million maturing in July 2003. Under the second interest rate swap agreement, the Company receives
payments based on the one-month LIBOR rate of 2.14% and pays a fixed rate of 6.535% at December 31, 2001.

The
differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to
interest expense by the Company pursuant to the terms of the agreements and have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk that the counterparties
may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, which is limited to major banks and financial institutions,
and does not anticipate non-performance by the counterparties. Net receipts (payments) under the interest rate swap agreements were $(1.3) million, $0.1 million and $0 for the years
ended December 31, 2001, 2000 and 1999.

The
fair value of the interest rate swap agreements are estimated based on quotes from the market makers of these instruments and represents the estimated amounts the Company would
expect to receive or pay to terminate the agreements. Credit and market risk exposures are limited to the net interest differentials. The estimated unrealized net loss on these instruments was
approximately $3.2 million and $0.8 million at December 31, 2001 and 2000.

The
Company's other borrowings are nonrecourse to the Company and contain provisions allowing for the substitution of collateral (except for the 1996 CMBS debt which matures in two
tranches in August 2008 and November 2011), upon satisfaction of certain conditions, after the respective loans have been outstanding for approximately four years. Most of the mortgage
borrowings are repayable and subject to various prepayment penalties, yield maintenance, or defeasance obligations. At December 31, 2001 and 2000, approximately 96% of RFS' debt is fixed at an
average interest rate of 7.7%.

Future
scheduled principal payments of debt obligations at December 31, 2001 are as follows (in thousands):

Amount2002

$
6,5472003


7,0442004


88,7352005


8,1522006


8,772Thereafter


181,885$
301,135


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.

F-13

---

The
Company may incur, or cause the Operating 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% (effective January 1, 2001) 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 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 year ended December 31, 2001 are as follows:

Current:State

$
20Deferred:Federal

$
(24,734
)Benefit from income taxes

$
(24,714
)


The
deferred tax benefit was calculated using an effective tax rate of 38% applied to the income of the TRS Lessees, adjusted for temporary differences related to the
Hilton lease termination transaction. The deferred tax asset relates mainly to the payments to terminate the operating leases, management contracts and ancillary agreements with Hilton that were
expensed for financial reporting purposes whereas, for tax purposes, these payments will be amortized over the lives of the leases. The Company believes that the TRS Lessees will generate sufficient
future taxable income to realize in full this deferred tax asset. Accordingly, no valuation allowance has been recorded at December 31, 2001.

F-14

---

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

Statutory U.S. Federal income tax benefit

35
%State income tax benefit

3
%Non-taxable REIT income

25
%Other

1
%Effective tax rate

64
%


F-15

---

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

The following table reconciles GAAP net income (loss) to taxable income for the years ended December 31, 2001, 2000 and 1999:

2001

2000

1999GAAP net income (loss)

$
(13,729
)
$
30,790

$
34,990Plus GAAP net loss on taxable subsidiaries included above


40,234


889


1,302GAAP net income from REIT operations (a)


26,505


31,679


36,292Book/tax differences on minority interest share of TRS Lessees' loss


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


4,333


(2,005
)

(4,609
)Book/tax differences on gains/losses from capital transactions


4,781


3,745


52Other book/tax differences, net


(180
)

915


1,689Adjusted taxable income subject to distribution requirement (b)

$
32,233

$
34,334

$
33,424


---

Characterization of distributions:

The following table characterizes distributions paid per common share for the years ended December 31, 2001, 2000 and 1999:

2001

2000

1999$

%

$

%

$

%Ordinary income

$
1.13

89.8
%
$
1.43

92.8
%
$
1.54

100
%Return of capital


0.09

6.7
%

0.02

1.3
%Capital gains







0.01

0.3
%Unrecaptured Section 1250 gain


0.04

3.5
%

0.08

5.6
%$
1.26

100
%
$
1.54

100
%
$
1.54

100
%


Note 6. Capital Stock

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.

F-16

---

On
January 2, 2001, the Company issued 250 thousand 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 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.

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.

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 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
$5 million per earthquake. The Company believes its current property insurance, which expires June 30, 2002, will protect it against losses resulting from a terrorist attack. Upon
renewal, the Company does not know whether its property insurance will protect it against losses resulting from a terrorist attack. The Company believes that such losses may not be economically
insurable. 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, 2001, the Company had a $0.6 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. On January 1, 2002, the letter of credit was increased to $2.0 million. There are no outstanding balances on the letter
of credit.

Effective
January 1, 2001, the Company receives rental income from five hotels leased to third parties under the Percentage Leases which expire in 2007 (1 hotel), 2008 (2 hotels)
and 2009 (2 hotels).

F-17

---

Minimum
future rental income (base rents) due the Company under these noncancelable operating leases at December 31, 2001, is as follows (in thousands):

Year

Amount2002

$
2,4892003


2,4892004


2,4892005


2,4892006


2,4892007 and thereafter


3,853$
16,298


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 2001
and 2000 were 3.4% and 2.7%, 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. Stock-Based Compensation Plans

The Company's Restricted Stock and Stock Option Plan (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 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.

The
Company applies APB Opinion No. 25 and related Interpretations in accounting for the Plan. In 1995, the Financial Accounting Standards Board issued SFAS Statement
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the Plan.
Adoption of the cost recognition provisions of SFAS 123 is optional and the Company has decided not to adopt the provisions of SFAS 123. However, pro forma disclosures, as if the Company
adopted the cost recognition requirements of SFAS 123, are required by SFAS 123 and are presented below.

F-18

---

A
summary of the Company's stock options under the Plan as of December 31, 2001, 2000 and 1999, and the changes during the years are presented below (in thousands, except per
share data):

|                                   |  | 2001 |                 | 2000 |   | 1999 
|---------------------------------- |  | ---- | --------------- | ---- | - | -----
|
|Outstanding at beginning of years  |  |      | 1,207           |      | $ | 13.43
|Granted                            |  |      | 680             |      |   | 11.47
|Exercised                          |  |      | (343            | )    |   | 12.30
|Forfeited                          |  |      | (156            | )    |   | 13.72
|                                   |  |      |                 |      |   |      
|Outstanding at end of years        |  |      | 1,388           |      | $ | 12.76
|                                   |  |      |                 |      |   |      
|Exercisable at end of years        |  |      | 519             |      | $ | 14.28
|                                   |  |      |                 |      |   |      
|Weighted-average fair value        |  |      |                 |      | $ | 1.10 
|                                   |  |      |                 |      |   |      
|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 8.0 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 $1.10;
volatility of 26.7% for 2001 grants, volatility of 26.2% for 2000 grants and 29% for 1999 grants, risk-free interest rate of 4.8% for 2001, 6.2% for 2000 and 5.9% for 1999 and expected
life of 6 years for 2001, 2000, and 1999.

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:

2001

2000

1999Net income (loss) applicable to common shareholders:As reported

$
(11,713
)
$
29,378

$
33,578Pro forma

$
(12,013
)
$
29,045


33,279Basic and diluted earnings (loss) per share:As reported

$
(0.47
)
$
1.20

$
1.34Pro forma

$
(0.48
)
$
1.18

$
1.33


The
effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts.

F-19

---

Restricted Stock.A summary of the status of the Company's restricted stock grants as of December 31, 2001, 2000 and
1999 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):

2001

2000

1999# Shares

Value

# Shares

Value

# Shares

ValueOutstanding at beginning of year

343,000

$
13.42

329,000

$
13.56

288,000

$
13.82Granted, subject to vesting

270,000

$
13.11

14,000

$
11.36

41,000

$
11.75Forfeited

(1,333
)
$
11.88Outstanding at end of year

611,667

$
13.31

343,000

$
13.42

329,000

$
13.56Vested at end of year

314,000

$
13.65

270,662

$
13.89

211,999

$
14.40


Note 9. Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board ("FASB") approved SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Statement requires that long-lived assets to be disposed of other than by sale be considered held and used until they are disposed. The Statement
requires that long-lived assets to be disposed of by sale be accounted for under the requirements of SFAS No. 121 which requires that such assets be measured at the lower of
carrying amounts or fair value less cost to sell and to cease depreciation. SFAS No. 144 requires a probability-weighted cash flow estimation approach with situations in which alternative
courses of action to recover the carrying amount of a long-lived asset are under consideration or a range of possible future cash flow amounts are estimated. As a result, discontinued
operations will no longer be measured on a net realizable basis, and future operating losses will no longer be recognized before they occur. Additionally, goodwill will be removed from the scope SFAS
No. 144 and as a result will no longer be required to be allocated to long-lived assets to be tested for impairment. The Statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is not currently affected by the Statement's requirements.

Note 10. Subsequent Events

In January, the Company sold its interest in an investment in an unconsolidated partnership for approximately $1.2 million, recognizing a gain on sale of
approximately $1.1 million.

On
February 20, 2002, the Company sold 1.15 million shares of common stock. Net proceeds of approximately $14.2 million from the sale of the common stock were used
to reduce the outstanding balance on the line of credit.

On
February 26, 2002, the Company sold $125 million of senior notes. The senior notes are unsecured and guaranteed by the Company and certain of its subsidiaries. The
Company has or is expected to use the net proceeds to retire the 1996 CMBS mortgage debt ($58.2 million outstanding at December 31, 2001), pay the prepayment penalty on the 1996 CMBS
mortgage debt of approximately $6.5 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 will also expense as an extraordinary item $1.4 million in unamortized debt costs.

F-20

---

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 February 7, 2002, except for Note 10, as to which the date is February 26, 2002,
appearing on page F-1 of the 2001 Form 10-K of RFS Hotel Investors, Inc. also included an audit of the financial statement schedule listed in Item 14(a) 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
February 7, 2002

F-21

---

RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2001
(In thousands)

|                    |                       |  |    |   |   |       |  | Cost Capitalized
Subsequent to
Acquisition |       | Gross Amount at
Which Carried
at end of Period |     |  |   |       |  |   |       |  |   | Life upon
Which
Depreciation
in Latest
Income
Statement is
Calculated
|------------------- | --------------------- |  | -- | - | - | ----- |  | ------------------------------------------ | ----- | ---------------------------------------------- | --- |  | - | ----- |  | - | ----- |  | - | ---------------------------------------------------------------------
|
|
|
|Sheraton Hotel      |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Clayton, MO           |  | (1 | ) | $ | 1,599 |  | $                                          | 4,968 |                                                |     |  | $ | 7,343 |  | $ | 1,599 |  | $ | 12,311                                                               
|Holiday Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Columbia, SC          |  | (1 | ) |   | 790   |  |                                            | 3,573 |                                                |     |  |   | 1,417 |  |   | 790   |  |   | 4,990                                                                
|Holiday Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Louisville, KY        |  | (1 | ) |   | 1,328 |  |                                            | 3,808 |                                                |     |  |   | 1,491 |  |   | 1,328 |  |   | 5,299                                                                
|Comfort Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Marietta, GA          |  | (2 | ) |   | 989   |  |                                            | 5,509 |                                                |     |  |   | 667   |  |   | 989   |  |   | 6,176                                                                
|Holiday Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Lafayette, LA         |  | (1 | ) |   | 700   |  |                                            | 8,858 |                                                |     |  |   | 1,621 |  |   | 700   |  |   | 10,479                                                               
|Residence Inn       |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Kansas City, MO       |  | (2 | ) |   | 392   |  |                                            | 5,344 |                                                |     |  |   | 503   |  |   | 392   |  |   | 5,847                                                                
|Comfort Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Ft Mill, SC           |  | (2 | ) |   | 763   |  |                                            | 6,612 |                                                |     |  |   | 481   |  |   | 763   |  |   | 7,093                                                                
|Hampton Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Ft Lauderdale, FL     |  | (1 | ) |   | 590   |  |                                            | 4,664 |                                                |     |  |   | 699   |  |   | 590   |  |   | 5,363                                                                
|Holiday Inn Express |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Arlington Heights, IL |  | (1 | ) |   | 350   |  |                                            | 4,121 |                                                |     |  |   | 569   |  |   | 350   |  |   | 4,690                                                                
|Hampton Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Denver, CO            |  | (1 | ) |   | 500   |  |                                            | 8,098 |                                                |     |  |   | 450   |  |   | 500   |  |   | 8,548                                                                
|Holiday Inn Express |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Downers Grove, IL     |  | (1 | ) |   | 400   |  |                                            | 5,784 |                                                |     |  |   | 513   |  |   | 400   |  |   | 6,297                                                                
|Hampton Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Indianapolis, IN      |  | (2 | ) |   | 475   |  |                                            | 8,008 |                                                |     |  |   | 517   |  |   | 475   |  |   | 8,525                                                                
|Hampton Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Lincoln, NE           |  | (1 | ) |   | 350   |  |                                            | 4,829 |                                                |     |  |   | 466   |  |   | 350   |  |   | 5,295                                                                
|Hampton Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Bloomington, MN       |  | (2 | ) |   | 375   |  |                                            | 8,657 |                                                |     |  |   | 304   |  |   | 375   |  |   | 8,961                                                                
|Holiday Inn Express |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Bloomington, MN       |  | (1 | ) |   | 780   |  |                                            | 6,910 |                                                | 152 |  |   | 997   |  |   | 932   |  |   | 7,907                                                                
|Hampton Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Minnetonka, MN        |  | (1 | ) |   | 475   |  |                                            | 5,066 |                                                |     |  |   | 264   |  |   | 475   |  |   | 5,330                                                                
|Hampton Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Oklahoma City, OK     |  | (2 | ) |   | 530   |  |                                            | 6,826 |                                                |     |  |   | 578   |  |   | 530   |  |   | 7,404                                                                
|Hampton Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Omaha, NE             |  | (2 | ) |   | 450   |  |                                            | 6,362 |                                                |     |  |   | 566   |  |   | 450   |  |   | 6,928                                                                
|Hampton Inn         |                       |  |    |   |   |       |  |                                            |       |                                                |     |  |   |       |  |   |       |  |   |                                                                      
|                    | Tulsa, OK             |  | (1 | ) |   | 350   |  |                                            | 5,715 |                                                |     |  |   | 753   |  |   | 350   |  |   | 6,468                                                                

F-22

---

RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2001
(In thousands)

|                    |                  |  |    |   |       |  |        | Cost Capitalized
Subsequent to
Acquisition |     | Gross Amount at
Which Carried
at end of Period |       |  |       |  |        |  |        |  |       | Life upon
Which
Depreciation
in Latest
Income
Statement is
Calculated
|------------------- | ---------------- |  | -- | - | ----- |  | ------ | ------------------------------------------ | --- | ---------------------------------------------- | ----- |  | ----- |  | ------ |  | ------ |  | ----- | ---------------------------------------------------------------------
|
|
|
|Holiday Inn Express |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Wauwatosa, WI    |  | (2 | ) | 700   |  | 4,926  |                                            |     |                                                | 662   |  | 700   |  | 5,588  |  | 6,288  |  | 996   |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Fishkill, NY     |  | (1 | ) | 2,280 |  | 10,484 |                                            |     |                                                | 915   |  | 2,280 |  | 11,399 |  | 13,679 |  | 1,971 |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Providence, RI   |  | (2 | ) | 1,385 |  | 7,742  |                                            |     |                                                | 513   |  | 1,385 |  | 8,255  |  | 9,640  |  | 1,472 |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Tyler, TX        |  | (1 | ) | 855   |  | 6,212  |                                            |     |                                                | 670   |  | 855   |  | 6,882  |  | 7,737  |  | 1,193 |                                                                      
|Hampton Inn         |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Memphis, TN      |  | (2 | ) | 980   |  | 6,157  |                                            |     |                                                | 156   |  | 980   |  | 6,313  |  | 7,293  |  | 1,126 |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Ft Worth, TX     |  | (2 | ) | 985   |  | 10,726 |                                            |     |                                                | 957   |  | 985   |  | 11,683 |  | 12,668 |  | 1,978 |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Wilmington, DE   |  | (1 | ) | 1,100 |  | 8,488  |                                            |     |                                                | 358   |  | 1,100 |  | 8,846  |  | 9,946  |  | 1,586 |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Torrance, CA     |  | (1 | ) | 2,600 |  | 17,789 |                                            |     |                                                | 1,810 |  | 2,600 |  | 19,599 |  | 22,199 |  | 3,342 |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Ann Arbor, MI    |  | (2 | ) | 525   |  | 4,461  |                                            | 227 |                                                | 3,279 |  | 752   |  | 7,740  |  | 8,492  |  | 1,154 |                                                                      
|Holiday Inn         |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Flint, MI        |  | (1 | ) | 1,220 |  | 11,994 |                                            |     |                                                | 515   |  | 1,220 |  | 12,509 |  | 13,729 |  | 2,192 |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Charlotte, NC    |  | (2 | ) | 850   |  | 3,844  |                                            | 159 |                                                | 3,402 |  | 1,009 |  | 7,246  |  | 8,255  |  | 910   |                                                                      
|Holiday Inn Express |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Austin, TX       |  | (2 | ) | 500   |  | 4,737  |                                            |     |                                                | 477   |  | 500   |  | 5,214  |  | 5,714  |  | 852   |                                                                      
|Hampton Inn         |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Lakewood, CO     |  | (2 | ) | 957   |  | 6,790  |                                            |     |                                                | 393   |  | 957   |  | 7,183  |  | 8,140  |  | 1,179 |                                                                      
|Hampton Inn         |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Hattiesburg, MS  |  | (2 | ) | 785   |  | 4,653  |                                            |     |                                                | 1,798 |  | 785   |  | 6,451  |  | 7,236  |  | 1,005 |                                                                      
|Hampton Inn         |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Laredo, TX       |  | (1 | ) | 1,037 |  | 4,116  |                                            |     |                                                | 31    |  | 1,037 |  | 4,147  |  | 5,184  |  | 661   |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Atlanta, GA      |  | (1 | ) | 1,306 |  | 10,200 |                                            |     |                                                | 772   |  | 1,306 |  | 10,972 |  | 12,278 |  | 1,631 |                                                                      
|Holiday Inn         |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Crystal Lake, IL |  | (2 | ) | 1,665 |  | 10,932 |                                            |     |                                                | 736   |  | 1,665 |  | 11,668 |  | 13,333 |  | 1,738 |                                                                      
|Residence Inn       |                  |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                    | Orlando, FL      |  | (2 | ) | 1,045 |  | 8,880  |                                            |     |                                                | 342   |  | 1,045 |  | 9,222  |  | 10,267 |  | 1,408 |                                                                      

F-23

---

RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2001
(In thousands)

|                      |                     |  |    |   |       |  |        | Cost Capitalized
Subsequent to
Acquisition |     | Gross Amount at
Which Carried
at end of Period |       |  |       |  |        |  |        |  |       | Life upon
Which
Depreciation
in Latest
Income
Statement is
Calculated
|--------------------- | ------------------- |  | -- | - | ----- |  | ------ | ------------------------------------------ | --- | ---------------------------------------------- | ----- |  | ----- |  | ------ |  | ------ |  | ----- | ---------------------------------------------------------------------
|
|
|
|Residence Inn         |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Sacramento, CA      |  | (2 | ) | 1,000 |  | 13,122 |                                            |     |                                                | 163   |  | 1,000 |  | 13,285 |  | 14,285 |  | 1,983 |                                                                      
|Doubletree Hotel      |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Del Mar, CA         |  | (2 | ) | 1,500 |  | 13,535 |                                            | 294 |                                                | 284   |  | 1,794 |  | 13,819 |  | 15,613 |  | 1,928 |                                                                      
|Courtyard by Marriott |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Flint, MI           |  | (1 | ) | 600   |  | 4,852  |                                            |     |                                                | 196   |  | 600   |  | 5,048  |  | 5,648  |  | 638   |                                                                      
|Hampton Inn           |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Sedona, AZ          |  | (1 | ) | 1,464 |  | 3,858  |                                            |     |                                                | 148   |  | 1,464 |  | 4,006  |  | 5,470  |  | 432   |                                                                      
|Hampton Inn           |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Chandler, AZ        |  | (1 | ) | 485   |  | 3,950  |                                            |     |                                                | 46    |  | 485   |  | 3,996  |  | 4,481  |  | 453   |                                                                      
|Hampton Inn           |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Houston, TX         |  | (1 | ) | 606   |  | 4,919  |                                            |     |                                                | 49    |  | 606   |  | 4,968  |  | 5,574  |  | 607   |                                                                      
|Sheraton Hotel        |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Milpitas, CA        |  | (2 | ) | 5,253 |  | 23,169 |                                            |     |                                                | 666   |  | 5,253 |  | 23,835 |  | 29,088 |  | 2,917 |                                                                      
|Sheraton Hotel        |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Sunnyvale, CA       |  | (2 | ) | 785   |  | 22,401 |                                            |     |                                                | 774   |  | 785   |  | 23,175 |  | 23,960 |  | 2,836 |                                                                      
|Sheraton Four Points  |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Pleasanton, CA      |  | (2 | ) | 1,935 |  | 19,251 |                                            |     |                                                | 495   |  | 1,935 |  | 19,746 |  | 21,681 |  | 2,430 |                                                                      
|Sheraton Four Points  |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Bakersfield, CA     |  | (2 | ) | 1,390 |  | 7,554  |                                            |     |                                                | 626   |  | 1,390 |  | 8,180  |  | 9,570  |  | 968   |                                                                      
|Beverly Heritage      |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Milpitas, CA        |  | (1 | ) | 5,250 |  | 25,118 |                                            |     |                                                | 4,878 |  | 5,250 |  | 29,996 |  | 35,246 |  | 3,073 |                                                                      
|Sheraton Hotel        |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Birmingham, AL      |  | (1 | ) | 3,103 |  | 13,491 |                                            |     |                                                | 1,067 |  | 3,103 |  | 14,558 |  | 17,661 |  | 1,475 |                                                                      
|Residence Inn         |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Jacksonville, FL    |  | (1 | ) | 1,339 |  | 4,990  |                                            |     |                                                | 63    |  | 1,339 |  | 5,053  |  | 6,392  |  | 521   |                                                                      
|Residence Inn         |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | West Palm Beach, FL |  | (1 | ) | 1,293 |  | 4,025  |                                            |     |                                                | 9     |  | 1,293 |  | 4,034  |  | 5,327  |  | 385   |                                                                      
|Hampton Inn           |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Jacksonville, FL    |  | (1 | ) | 1,047 |  | 4,375  |                                            |     |                                                | 11    |  | 1,047 |  | 4,386  |  | 5,433  |  | 419   |                                                                      
|Homewood Suites       |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | Chandler, AZ        |  | (1 | ) | 485   |  | 4,601  |                                            |     |                                                | 24    |  | 485   |  | 4,625  |  | 5,110  |  | 430   |                                                                      
|Hotel Rex             |                     |  |    |   |       |  |        |                                            |     |                                                |       |  |       |  |        |  |        |  |       |                                                                      
|                      | San Francisco, CA   |  | (1 | ) | 3,000 |  | 11,039 |                                            |     |                                                | 112   |  | 3,000 |  | 11,151 |  | 14,151 |  | 1,015 |                                                                      

F-24

---

RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2001
(In thousands)

|                 |                   |  |      |        |   |        |       | Cost Capitalized
Subsequent to
Acquisition |         | Gross Amount at
Which Carried
at end of Period |   |     |  |   |        |        |   |        |       | Life upon
Which
Depreciation
in Latest
Income
Statement is
Calculated
|---------------- | ----------------- |  | ---- | ------ | - | ------ | ----- | ------------------------------------------ | ------- | ---------------------------------------------- | - | --- |  | - | ------ | ------ | - | ------ | ----- | ---------------------------------------------------------------------
|
|
|
|Hilton           |                   |  |      |        |   |        |       |                                            |         |                                                |   |     |  |   |        |        |   |        |       |                                                                      
|                 | San Francisco, CA |  | $    | 18,556 |   |        | 3,007 |                                            |         | 28,308                                         |   |     |  |   |        | 11,498 |   |        | 3,007 |                                                                      
|TownPlace Suites |                   |  |      |        |   |        |       |                                            |         |                                                |   |     |  |   |        |        |   |        |       |                                                                      
|                 | Ft. Worth, TX     |  |      | (1     | ) |        | 753   |                                            |         | 4,721                                          |   |     |  |   |        | 99     |   |        | 753   |                                                                      
|TownPlace Suites |                   |  |      |        |   |        |       |                                            |         |                                                |   |     |  |   |        |        |   |        |       |                                                                      
|                 | Miami, FL         |  |      | (1     | ) |        | 895   |                                            |         | 5,187                                          |   |     |  |   |        | 30     |   |        | 895   |                                                                      
|TownPlace Suites |                   |  |      |        |   |        |       |                                            |         |                                                |   |     |  |   |        |        |   |        |       |                                                                      
|                 | Miami (West), FL  |  |      | (1     | ) |        | 914   |                                            |         | 5,210                                          |   |     |  |   |        | 170    |   |        | 914   |                                                                      
|Unimproved land  |                   |  |      |        |   |        |       |                                            |         |                                                |   |     |  |   |        |        |   |        |       |                                                                      
|Crystal Lake, IL |                   |  | none |        |   | 504    |       |                                            |         |                                                |   |     |  |   |        |        |   | 504    |       |                                                                      
|                 |                   |  |      |        |   |        |       |                                            |         |                                                |   |     |  |   |        |        |   |        |       |                                                                      
|Totals           |                   |  |      |        | $ | 69,569 |       | $                                          | 484,519 |                                                | $ | 832 |  | $ | 59,393 |        | $ | 70,401 |       | $                                                                    
|                 |                   |  |      |        |   |        |       |                                            |         |                                                |   |     |  |   |        |        |   |        |       |                                                                      

---

2001

2000

1999Cost of land and improvements, buildings and improvements:Balance at beginning of year

$
613,733

$
618,066

$
573,912Additions


11,849


17,179


44,154Disposals


(11,269
)

(21,512
)Balance at end of year

$
614,313

$
613,733

$
618,066Accumulated depreciation on land improvements, buldings and improvementsBalance at beginning of year

$
64,247

$
53,124

$
40,979Additions


13,571


16,994


12,145Disposals


(1,381
)

(5,871
)Balance at end of year

$
76,437

$
64,247

$
53,124


F-25

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