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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

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

for the quarterly period ended June 30, 2002

OR

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

for the transition period from  to

Commission File number 333-84334

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RFS PARTNERSHIP, L.P.(exact name of registrant as specified in its charter)

Tennessee(State or other incorporation)

62-1541639(I.R.S. Employer Identification Number)850 Ridge Lake Boulevard, Suite 300,
Memphis, TN 38120
(901) 767-7005(Address of principal executive offices
including zip code and telephone number)


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Indicate
by check mark whether the Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.

ý Yes    o No

The
number of units outstanding on August 14, 2002 was 30,920,838.

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RFS PARTNERSHIP, L.P.
INDEX

|         |         |                       |                                                                                                             |  | PAGE
|-------- | ------- | --------------------- | ----------------------------------------------------------------------------------------------------------- |  | ----
|PART I.  |         | FINANCIAL INFORMATION |                                                                                                             | 
|         | Item 1. |                       | Financial Statements                                                                                        |  |     
|         |         |                       | Consolidated Balance SheetsJune 30, 2002 (unaudited) and December 31, 2001                                 |  | 3   
|         |         |                       | Consolidated Statements of OperationsFor the three and six months ended June 30, 2002 and 2001 (unaudited) |  | 4   
|         |         |                       | Consolidated Statements of Cash FlowsFor the three and six months ended June 30, 2002 and 2001 (unaudited) |  | 5   
|         |         |                       | Notes to Consolidated Financial Statements                                                                  |  | 6   
|         | Item 2. |                       | Management's Discussion and Analysis of Financial Condition and Results of Operations                       |  | 16  
|         | Item 3. |                       | Quantitative and Qualitative Disclosure About Market Risk                                                   |  | 25  
|PART II. |         | OTHER INFORMATION     |                                                                                                             | 
|         | Item 4. |                       | Submission of Matters to Vote of Security Holders                                                           |  | 27  
|         | Item 6. |                       | Exhibits and Reports on Form 8-K                                                                            |  | 27  

2

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

|                                                                                                                           |                         | June 30,
2002                           |                   | December 31,
2001 |        
|-------------------------------------------------------------------------------------------------------------------------- | ----------------------- | --------------------------------------- | ----------------- | ----------------- | -------
|
|ASSETS                                                                                                                     |                         |                                         |                   |                   |        
|Investment in hotel properties, net                                                                                        |                         | $                                       | 605,326           |                   | $      
|Cash and cash equivalents                                                                                                  |                         |                                         | 10,473            |                   |        
|Restricted cash                                                                                                            |                         |                                         | 5,375             |                   |        
|Accounts receivable                                                                                                        |                         |                                         | 5,105             |                   |        
|Deferred expenses, net                                                                                                     |                         |                                         | 8,764             |                   |        
|Other assets                                                                                                               |                         |                                         | 3,674             |                   |        
|Deferred income taxes                                                                                                      |                         |                                         | 25,114            |                   |        
|                                                                                                                           |                         |                                         |                   |                   |        
|                                                                                                                           |                         |                                         | Total assets      |                   | $      
|                                                                                                                           |                         |                                         |                   |                   |        
|LIABILITIES AND PARTNERS' CAPITAL                                                                                          |                         |                                         |                   |                   |        
|Accounts payable and accrued expenses                                                                                      |                         | $                                       | 26,960            |                   | $      
|Borrowings on Line of Credit                                                                                               |                         |                                         | 9,250             |                   |        
|Mortgage notes payable                                                                                                     |                         |                                         | 160,530           |                   |        
|Senior notes payable                                                                                                       |                         |                                         | 125,000           |                   |        
|                                                                                                                           |                         |                                         |                   |                   |        
|                                                                                                                           |                         |                                         | Total liabilities |                   |        
|Commitments and contingencies                                                                                              |                         |                                         |                   |                   |        
|Series B Preferred Units, $0.01 par value, 5,000 units authorized, 250 units issued and outstanding at December 31, 2001   |                         |                                         |                  |                   |        
|Redeemable limited partnership units at redemption value, 2,459 units at June 30, 2002 and December 31, 2001, respectively |                         |                                         | 33,291            |                   |        
|Partners' Capital:                                                                                                         |                         |                                         |                   |                   |        
|Other comprehensive income                                                                                                 |                         |                                         |                   |                   |        
|General partnership units, 28,465 units and 25,235 units at June 30, 2002 and December 31, 2001, respectively              |                         |                                         | 308,800           |                   |        
|                                                                                                                           |                         |                                         |                   |                   |        
|                                                                                                                           | Total partners' capital |                                         |                   | 308,800           |        
|                                                                                                                           |                         |                                         |                   |                   |        
|                                                                                                                           |                         | Total liabilities and partners' capital |                   | $                 | 663,831
|                                                                                                                           |                         |                                         |                   |                   |        

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

3

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RFS PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands, except per unit data)
(unaudited)

|                                                             |                                                          | Three Months Ended
June 30,    |        | Six Months Ended
June 30, |       
|------------------------------------------------------------ | -------------------------------------------------------- | ------------------------------ | ------ | ------------------------- | ------
|
|Revenue:                                                     |                                                          |                                |        |                           |       
|                                                             | Rooms                                                    |                                |        | 46,374                    |       
|                                                             | Food and beverage                                        |                                |        | 4,674                     |       
|                                                             | Other operating departments                              |                                |        | 1,730                     |       
|                                                             | Lease revenue                                            |                                |        | 1,234                     |       
|                                                             | Deferred revenue                                         |                                |        | (491                      | )     
|                                                             | Other                                                    |                                |        | 107                       |       
|                                                             |                                                          |                                |        |                           |       
|                                                             |                                                          | Total hotel revenue            |        |                           | 53,628
|                                                             |                                                          |                                |        |                           |       
|Hotel operating expenses by department:                      |                                                          |                                |        |                           |       
|                                                             | Rooms                                                    |                                |        | 9,118                     |       
|                                                             | Food and beverage                                        |                                |        | 3,346                     |       
|                                                             | Other operating departments                              |                                |        | 465                       |       
|Undistributed operating expenses:                            |                                                          |                                |        |                           |       
|                                                             | Property operating costs                                 |                                |        | 5,445                     |       
|                                                             | Property taxes, insurance and other                      |                                |        | 3,174                     |       
|                                                             | Franchise costs                                          |                                |        | 4,388                     |       
|                                                             | Maintenance and repair                                   |                                |        | 2,500                     |       
|                                                             | Management fees                                          |                                |        | 1,270                     |       
|                                                             | Depreciation                                             |                                |        | 7,612                     |       
|                                                             | Hilton lease termination                                 |                                |        |                          |       
|                                                             | Amortization of franchise fees and unearned compensation |                                |        | 319                       |       
|                                                             | General and administrative                               |                                |        | 5,032                     |       
|                                                             |                                                          |                                |        |                           |       
|                                                             |                                                          | Total hotel operating expenses |        |                           | 42,669
|                                                             |                                                          |                                |        |                           |       
|Operating income (loss)                                      |                                                          |                                | 10,959 |                           |       
|Debt extinguishment and swap termination costs               |                                                          |                                |       |                           |       
|Amortization of loan origination costs                       |                                                          |                                | 420    |                           |       
|Interest expense                                             |                                                          |                                | 6,511  |                           |       
|                                                             |                                                          |                                |        |                           |       
|Income (loss) before gain on sale of assets and income taxes |                                                          |                                | 4,028  |                           |       
|Loss (gain) on sale of assets                                |                                                          |                                | 10     |                           |       
|Provision for (benefit from) income taxes                    |                                                          |                                | 130    |                           |       
|                                                             |                                                          |                                |        |                           |       
|Net income (loss)                                            |                                                          |                                | 3,888  |                           |       
|Preferred unit dividends                                     |                                                          |                                | (781   | )                         |       
|Gain (loss) on redemption of Preferred Units                 |                                                          |                                | (1,890 | )                         |       
|                                                             |                                                          |                                |        |                           |       
|Net income (loss) applicable to common unitholders           |                                                          | $                              | 1,217  |                           | $     
|                                                             |                                                          |                                |        |                           |       
|Earnings (loss) per unitbasic and diluted                   |                                                          | $                              | 0.04   |                           | $     
|Weighted average common units outstandingbasic              |                                                          |                                | 29,505 |                           |       
|Weighted average common units outstandingdiluted            |                                                          |                                | 29,676 |                           |       

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

4

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RFS PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands)
(unaudited)

|                                                 |                                                                                        | 2002                               |                                       | 2001                                             |       
|------------------------------------------------ | -------------------------------------------------------------------------------------- | ---------------------------------- | ------------------------------------- | ------------------------------------------------ | ------
|Cash flows from operating activities:            |                                                                                        |                                    |                                       |                                                  |       
|                                                 | Net loss                                                                               |                                    | $                                     | (4,455                                           | )     
|                                                 | Adjustments to reconcile net loss to net cash provided (used) by operating activities: |                                    |                                       |                                                  |       
|                                                 |                                                                                        | Depreciation and amortization      |                                       |                                                  | 16,348
|                                                 |                                                                                        | Write-off of deferred expenses     |                                       |                                                  | 1,361 
|                                                 |                                                                                        | Gain on sale of assets             |                                       |                                                  | (962  
|                                                 |                                                                                        | Changes in assets and liabilities: |                                       |                                                  |       
|                                                 |                                                                                        |                                    | Accounts receivable                   |                                                  |       
|                                                 |                                                                                        |                                    | Other assets                          |                                                  |       
|                                                 |                                                                                        |                                    | Deferred income taxes                 |                                                  |       
|                                                 |                                                                                        |                                    | Accounts payable and accrued expenses |                                                  |       
|                                                 |                                                                                        |                                    |                                       |                                                  |       
|                                                 |                                                                                        |                                    |                                       | Net cash provided (used) by operating activities |       
|                                                 |                                                                                        |                                    |                                       |                                                  |       
|Cash flows from investing activities:            |                                                                                        |                                    |                                       |                                                  |       
|                                                 | Investment in hotel properties                                                         |                                    |                                       | (4,646                                           | )     
|                                                 | Cash paid for franchise fees                                                           |                                    |                                       |                                                  |       
|                                                 | Restricted cash                                                                        |                                    |                                       | 1,442                                            |       
|                                                 | Proceeds from sale of assets                                                           |                                    |                                       | 1,111                                            |       
|                                                 |                                                                                        |                                    |                                       |                                                  |       
|                                                 |                                                                                        |                                    |                                       | Net cash used by investing activities            |       
|                                                 |                                                                                        |                                    |                                       |                                                  |       
|Cash flows from financing activities:            |                                                                                        |                                    |                                       |                                                  |       
|                                                 | Net proceeds (payments) on line of credit                                              |                                    |                                       | (71,938                                          | )     
|                                                 | Proceeds from issuance of debt                                                         |                                    |                                       | 125,000                                          |       
|                                                 | Payments on mortgage notes payable                                                     |                                    |                                       | (59,417                                          | )     
|                                                 | Redemption of preferred units                                                          |                                    |                                       | (25,850                                          | )     
|                                                 | Distributions to unitholders                                                           |                                    |                                       | (15,838                                          | )     
|                                                 | Issuance of common and preferred units                                                 |                                    |                                       | 39,653                                           |       
|                                                 | Loan fees paid                                                                         |                                    |                                       | (4,004                                           | )     
|                                                 |                                                                                        |                                    |                                       |                                                  |       
|                                                 |                                                                                        |                                    |                                       | Net cash provided by financing activities        |       
|                                                 |                                                                                        |                                    |                                       |                                                  |       
|Net increase in cash and cash equivalents        |                                                                                        |                                    | 4,738                                 |                                                  |       
|Cash and cash equivalents at beginning of period |                                                                                        |                                    | 5,735                                 |                                                  |       
|                                                 |                                                                                        |                                    |                                       |                                                  |       
|Cash and cash equivalents at end of period       |                                                                                        | $                                  | 10,473                                |                                                  | $     
|                                                 |                                                                                        |                                    |                                       |                                                  |       

Supplemental disclosure of non-cash activities:

In
2002, the Partnership:



In
2001, the Partnership:



5

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RFS PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.Organization.RFS Partnership, L.P. (the "Partnership"), owns interests in 58 hotels with 8,424 room located in 24 states
(collectively the "Hotels") at June 30, 2002. RFS Hotel Investors, Inc. ("RFS") is the general partner and owns an approximate 92% ownership in the Partnership. At June 30, 2002,
third party limited partners own the remaining 8%.

These
unaudited consolidated financial statements include the accounts of the Partnership and have been prepared in accordance with generally accepted accounting principles for interim
financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all the information and footnotes required by generally
accepted accounting principles for audited financial statements and should be read in conjunction with the financial statements and notes thereto of the Partnership for the year ended
December 31, 2001 included in the Partnership's Registration Statement on Form S-4. The following notes to the consolidated financial statements highlight significant changes
to notes included in the financial statements that were included in the S-4 and present interim disclosures required by the SEC. The accompanying consolidated financial statements reflect,
in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. The results of
operations for the three and six months ended June 30, 2002 and 2001 are not necessarily indicative of the results of operations to be expected for the full year or future periods.

2.Basic and Diluted Earnings Per Unit.Basic earnings per unit is computed by dividing net income
(loss) applicable to unitholders by the weighted average number of units outstanding during the period. Diluted earnings per unit is computed by dividing net income (loss) applicable to unitholders by
the weighted average number of units and equivalents outstanding. Unit equivalents represent units issuable upon exercise of options. For the six months ended June 30, 2002 and 2001, unit
equivalents would be antidilutive, and accordingly, for those periods, are not assumed to be converted in the computation of diluted earnings per unit. In addition, the Series B Preferred Units
are non-convertible and accordingly are not included in the computation of diluted earnings per unit.

3.Declaration of Dividends.On August 1, 2002, the Partnership declared a $0.25 dividend on
each general partnership and limited partnership unit outstanding to unitholders of record on September 6, 2002. The dividend will be paid on September 16, 2002.

4.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 provisions of the Percentage Lease agreements. SAB 101 effectively defers the recognition
of revenue from its percentage leases for the first and second quarters to the third and fourth quarters. At June 30, 2002, deferred revenue of $1.5 million is included in accounts
payable and accrued expenses. The lessees are in compliance with their rental obligations under the Percentage Leases. For the three and six months ended June 30, 2002 and 2001, five hotels
were leased to third-party lessees.

5.Debt.On February 26, 2002, the Partnership sold $125 million of senior notes. The
senior notes mature March 1, 2012 and bear interest at a rate of 9.75% per year, payable semi-annually, in arrears, on March 1 and September 1 of each year, commencing
on September 1, 2002. The senior notes are unsecured obligations of the Partnership and are guaranteed by RFS and certain of its subsidiaries. The senior notes contain covenants that could,
among other things, restrict the Partnership's ability to borrow money, pay dividends on or repurchase units, make investments, and sell assets or enter into mergers and consolidations.

6

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Net
proceeds of $121.5 million were used to retire the 1996 CMBS mortgage debt on March 20, 2002 ($57.5 million outstanding), pay the prepayment penalty on the 1996
CMBS mortgage debt of approximately $5.5 million, terminate the two outstanding interest rate swap agreements for approximately $3.2 million, with the balance used to reduce outstanding
borrowings under the line of credit. As a result of the prepayment of the 1996 CMBS debt, the Partnership expensed $1.4 million in unamortized debt issuance costs.

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

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

7.Preferred Units.On June 28, 2002, the Partnership repurchased all of its Series B preferred units from RFS
for an aggregate purchase price of $25,850,000, excluding dividends. Dividends were paid through June 30, 2002. The Series B preferred units paid an annual dividend of 12.5%. The
Partnership expensed in the second quarter $1.9 million in costs associated with the repurchase, comprised of $0.9 million related to prepayment costs and $1.0 million in issuance
costs.

8.Gain (Loss) on Sale of Assets.For the quarter ended June 30, 2002, the Partnership incurred a loss of
$10 thousand related to the sale of an automobile. In the quarter ended March 31, 2002, the Partnership recognized a gain of approximately $1.0 million on the sale of an
unconsolidated joint venture for approximately $1.1 million. Net proceeds from the sale were used to reduce the borrowings outstanding on the line of credit.

9.Income Taxes.The Partnership 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 Partnership 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 provision (benefit) for the three and six months ended June 30, 2002 are as follows:

Three Months Ended

Six Months EndedDeferred:Federal


130


(380
)Provision for (benefit from) income taxes

$
130

$
(380
)


The
deferred provision for (benefit from) income taxes and related deferred tax asset was calculated using an effective tax rate of 38% applied to the loss of the TRS Lessees.

The
deferred tax asset relates mainly to the payments to terminate the operating leases, management contracts and ancillary agreements with Hilton in 2001 that were expensed for
financial reporting purposes whereas, for tax purposes, these payments will be amortized over the lives of the leases. The Partnership believes that the TRS Lessees will generate sufficient future
taxable income to realize in full the deferred tax asset. Accordingly, no valuation allowance has been recorded at June 30, 2002. The Partnership anticipates it will not pay any significant
federal or state income taxes.

7

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10.Comprehensive Income.SFAS No. 130, "Reporting Comprehensive Income," requires the disclosure of the components
included in comprehensive income (loss). For the three months ended June 30, 2002, the Partnership's comprehensive income was $1.2 million, the same as the Partnership's net income. For
the six months ended June 30, 2002, the Partnership's comprehensive loss was $4.7 million, comprised of the Partnership's net loss of $7.9 million, offset by the termination of
the interest rate swaps of $3.2 million that was previously included in comprehensive income.

11.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 Partnership has determined that its business is conducted in one operating segment.

12.Recent Accounting Pronouncements.The Partnership has elected to adopt the provisions of SFAS 145, "Rescission of
FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002". SFAS 145 rescinds the provisions of SFAS 4 that would have required the loss on the
extinguishment of debt for the six months ended June 30, 2002 of $6.9 million (excludes $3.2 million swap termination costs) described in Note 5 to be reported net of tax
as an extraordinary item.

13.Consolidated Financial Information.RFS Leasing II, Inc., RFS Leasing VII, Inc., RFS Financing Partnership,
L.P., RFS Financing Corporation and RFS Financing 2002, LLC, wholly-owned subsidiaries of the Partnership ("Guarantor Subsidiaries"), have guaranteed on a full and unconditional basis, the payment of
amounts due under the Partnership's $125 million senior notes. RFS Leasing II and RFS Leasing VII had no substantial operations prior to January 1, 2001. RFS Leasing II leases 15 hotels
directly from RFS Financing Partnership, L.P., which owns the fifteen hotels. RFS Leasing VII leases 21 hotels from the Partnership. As of and for the three and six months ended June 30, 2002
and the year ended December 31, 2001, RFS Leasing II and RFS Leasing VII did not have a material amount of assets, and incurred both operating and net losses. RFS Financing 2002 was formed to
facilitate the issuance of the senior notes in February, 2002. RFS Financing Corporation was formed to facilitate the issuance of the 1996 commercial mortgage bonds, which were redeemed with a portion
of the proceeds from the sale of the senior notes. RFS Financing Corporation and RFS Financing 2002 have no operations or assets and no sources of revenue or cash flow. Consequently, in the event that
is becomes necessary for RFS Leasing II, RFS Leasing VII, RFS Financing 2002 or RFS Financing Corporation to provide credit support for the senior notes, RFS Leasing VII, RFS Leasing II, RFS Financing
2002 and RFS Financing Corporation likely will not have sufficient cash flow to make any required payments under the senior notes.

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

8

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Consolidating Balance Sheet
June 30, 2002
(in thousands)

|                                      |                                         | RFS
Partnership, L.P. |         | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |         | Eliminations |         | Total
Consolidated
|------------------------------------- | --------------------------------------- | --------------------- | ------- | ---------------------- | - | -------------------------- | ------- | ------------ | ------- | ------------------
|ASSETS                                |                                         |                       |         |                        |   |                            |         |              |         |                   
|Investment in hotel properties, net   |                                         | $                     | 212,932 |                        | $ | 141,073                    |         | $            | 251,321 |                   
|Investment in consolidated entities   |                                         |                       | 267,626 |                        |   |                            |         |              | 19,889  |                   
|Cash and cash equivalents             |                                         |                       | 3,789   |                        |   | 3,825                      |         |              | 2,859   |                   
|Restricted cash                       |                                         |                       | 20      |                        |   |                            |         |              | 5,355   |                   
|Accounts receivable                   |                                         |                       | 3,957   |                        |   | 13,791                     |         |              | 11,901  |                   
|Deferred expenses, net                |                                         |                       | 6,424   |                        |   | 126                        |         |              | 2,214   |                   
|Other assets                          |                                         |                       | 1,713   |                        |   | 537                        |         |              | 1,424   |                   
|Deferred income taxes                 |                                         |                       |         |                        |   | 13,920                     |         |              | 11,194  |                   
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|                                      | Total assets                            |                       | $       | 496,461                |   | $                          | 173,272 |              | $       | 306,157           
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|LIABILITIES AND PARTNERS' CAPITAL     |                                         |                       |         |                        |   |                            |         |              |         |                   
|Accounts payable and accrued expenses |                                         | $                     | 20,120  |                        | $ | 9,811                      |         | $            | 21,573  |                   
|Borrowings on Line of Credit          |                                         |                       | 9,250   |                        |   |                            |         |              |         |                   
|Mortgage notes payable                |                                         |                       |         |                        |   |                            |         |              | 160,530 |                   
|Senior notes payable                  |                                         |                       | 125,000 |                        |   |                            |         |              |         |                   
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|                                      | Total liabilities                       |                       |         | 154,370                |   |                            | 9,811   |              |         | 182,103           
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|Redeemable units at redemption value  |                                         |                       | 33,291  |                        |   |                            |         |              |         |                   
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|General partnership units             |                                         |                       | 308,800 |                        |   | 163,461                    |         |              | 124,054 |                   
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|                                      | Total partners' capital                 |                       |         | 308,800                |   |                            | 163,461 |              |         | 124,054           
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   
|                                      | Total liabilities and partners' capital |                       | $       | 496,461                |   | $                          | 173,272 |              | $       | 306,157           
|                                      |                                         |                       |         |                        |   |                            |         |              |         |                   

9

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Consolidating Balance Sheet
December 31, 2001
(in thousands)

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

10

---

Consolidating Statement of Operations
For the Three Months Ended June 30, 2002
(in thousands)

|                                  |                                                                     | RFS
Partnership, L.P. |                          | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |        | Eliminations |        | Total
Consolidated |  
|--------------------------------- | ------------------------------------------------------------------- | --------------------- | ------------------------ | ---------------------- | - | -------------------------- | ------ | ------------ | ------ | ------------------ | -
|Revenue:                          |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Rooms                                                               |                       |                          |                        |   | $                          | 30,889 |              | $      | 15,485             |  
|                                  | Food and beverage                                                   |                       |                          |                        |   |                            | 3,186  |              |        | 1,488              |  
|                                  | Other operating departments                                         |                       |                          |                        |   |                            | 937    |              |        | 793                |  
|                                  | Lease revenue                                                       |                       | $                        | 7,291                  |   |                            | 5,841  |              |        | 609                |  
|                                  | Deferred revenue                                                    |                       |                          | (163                   | ) |                            |        |              |        | (328               | )
|                                  | Other                                                               |                       |                          | 232                    |   |                            | 8      |              |        | 52                 |  
|                                  |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  |                                                                     |                       | Total hotel revenue      |                        |   | 7,360                      |        |              | 40,861 |                    |  
|                                  |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|Hotel operating expenses:         |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Rooms                                                               |                       |                          |                        |   |                            | 6,185  |              |        | 2,933              |  
|                                  | Food and beverage                                                   |                       |                          |                        |   |                            | 2,445  |              |        | 901                |  
|                                  | Other operating departments                                         |                       |                          |                        |   |                            | 322    |              |        | 143                |  
|Undistributed operating expenses: |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Property operating costs                                            |                       |                          |                        |   |                            | 3,821  |              |        | 1,624              |  
|                                  | Property taxes, insurance and other                                 |                       |                          | 888                    |   |                            | 954    |              |        | 1,332              |  
|                                  | Franchise costs                                                     |                       |                          | (40                    | ) |                            | 2,765  |              |        | 1,663              |  
|                                  | Maintenance and repair                                              |                       |                          |                        |   |                            | 1,697  |              |        | 803                |  
|                                  | Management fees                                                     |                       |                          |                        |   |                            | 839    |              |        | 431                |  
|                                  | Percentage lease expense                                            |                       |                          |                        |   |                            | 12,507 |              |        |                    |  
|                                  | Depreciation                                                        |                       |                          | 2,592                  |   |                            | 1,835  |              |        | 3,185              |  
|                                  | Amortization of franchise fees and unearned compensation            |                       |                          | 302                    |   |                            | 11     |              |        | 6                  |  
|                                  | General and administrative                                          |                       |                          | 194                    |   |                            | 2,724  |              |        | 2,114              |  
|                                  |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  |                                                                     |                       | Total operating expenses |                        |   | 3,936                      |        |              | 36,105 |                    |  
|                                  |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Operating income                                                    |                       |                          | 3,424                  |   |                            | 4,756  |              |        | 2,964              |  
|                                  | Amortization of loan origination costs                              |                       |                          | 344                    |   |                            |        |              |        | 76                 |  
|                                  | Interest expense                                                    |                       |                          | 3,285                  |   |                            | 186    |              |        | 3,225              |  
|                                  | Equity in (earnings) loss of consolidated subsidiaries              |                       |                          | (4,103                 | ) |                            |        |              |        | 483                |  
|                                  |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Income (loss) before (gain) loss on sale of assets and income taxes |                       |                          | 3,898                  |   |                            | 4,570  |              |        | (820               | )
|                                  | Loss on sale of assets                                              |                       |                          | 10                     |   |                            |        |              |        |                    |  
|                                  | Provision for (benefit from) income taxes                           |                       |                          |                        |   |                            | (296   | )            |        | 426                |  
|                                  |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Net income (loss)                                                   |                       |                          | 3,888                  |   |                            | 4,866  |              |        | (1,246             | )
|                                  | Preferred unit dividends                                            |                       |                          | (781                   | ) |                            |        |              |        |                    |  
|                                  | Loss on redemption of Preferred Units                               |                       |                          | (1,890                 | ) |                            |        |              |        |                    |  
|                                  |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Net income (loss) applicable to unitholders                         |                       | $                        | 1,217                  |   | $                          | 4,866  |              | $      | (1,246             | )
|                                  |                                                                     |                       |                          |                        |   |                            |        |              |        |                    |  

11

---

Consolidating Statement of Operations
For the Three Months Ended June 30, 2001
(in thousands)

|                                  |                                                              | RFS
Partnership, L.P. |                          | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |        | Eliminations |        | Total
Consolidated |  
|--------------------------------- | ------------------------------------------------------------ | --------------------- | ------------------------ | ---------------------- | - | -------------------------- | ------ | ------------ | ------ | ------------------ | -
|Revenue:                          |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Rooms                                                        |                       |                          |                        |   | $                          | 34,012 |              | $      | 18,151             |  
|                                  | Food and beverage                                            |                       |                          |                        |   |                            | 3,179  |              |        | 1,401              |  
|                                  | Other operating departments                                  |                       |                          |                        |   |                            | 1,406  |              |        | 1,157              |  
|                                  | Lease revenue                                                |                       | $                        | 9,116                  |   |                            | 6,491  |              |        | 687                |  
|                                  | Deferred revenue                                             |                       |                          | (37                    | ) |                            |        |              |        | (420               | )
|                                  | Other                                                        |                       |                          | 109                    |   |                            | 48     |              |        | 165                |  
|                                  |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  |                                                              |                       | Total hotel revenue      |                        |   | 9,188                      |        |              | 45,136 |                    |  
|                                  |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|Hotel operating expenses:         |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Rooms                                                        |                       |                          |                        |   |                            | 6,447  |              |        | 3,400              |  
|                                  | Food and beverage                                            |                       |                          |                        |   |                            | 2,646  |              |        | 907                |  
|                                  | Other operating departments                                  |                       |                          |                        |   |                            | 409    |              |        | 148                |  
|Undistributed operating expenses: |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Property operating costs                                     |                       |                          |                        |   |                            | 3,992  |              |        | 1,678              |  
|                                  | Property taxes, insurance and other                          |                       |                          | 754                    |   |                            | 846    |              |        | 1,296              |  
|                                  | Franchise costs                                              |                       |                          | (66                    | ) |                            | 2,795  |              |        | 1,892              |  
|                                  | Maintenance and repair                                       |                       |                          |                        |   |                            | 1,800  |              |        | 816                |  
|                                  | Management fees                                              |                       |                          |                        |   |                            | 981    |              |        | 551                |  
|                                  | Percentage lease expense                                     |                       |                          |                        |   |                            | 14,865 |              |        |                    |  
|                                  | Depreciation                                                 |                       |                          | 2,570                  |   |                            | 1,780  |              |        | 3,133              |  
|                                  | Lease termination                                            |                       |                          |                        |   |                            |        |              |        | 600                |  
|                                  | Amortization of franchise fees and unearned compensation     |                       |                          | 340                    |   |                            | 11     |              |        | 6                  |  
|                                  | General and administrative                                   |                       |                          | 220                    |   |                            | 2,861  |              |        | 1,928              |  
|                                  |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  |                                                              |                       | Total operating expenses |                        |   | 3,818                      |        |              | 39,433 |                    |  
|                                  |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Operating income                                             |                       |                          | 5,370                  |   |                            | 5,703  |              |        | 4,786              |  
|                                  | Amortization of loan origination costs                       |                       |                          | 236                    |   |                            | 38     |              |        | 76                 |  
|                                  | Interest expense                                             |                       |                          | 1,870                  |   |                            | 1,250  |              |        | 3,281              |  
|                                  | Equity in (earnings) loss of consolidated subsidiaries       |                       |                          | (7,064                 | ) |                            |        |              |        | 755                |  
|                                  |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Income (loss) before gain on sale of assets and income taxes |                       |                          | 10,328                 |   |                            | 4,415  |              |        | 674                |  
|                                  | Gain on sale of assets                                       |                       |                          |                        |   |                            |        |              |        | (1,200             | )
|                                  | Provision for (benefit from) income taxes                    |                       |                          |                        |   |                            | 73     |              |        | (93                | )
|                                  |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Net income                                                   |                       |                          | 10,328                 |   |                            | 4,342  |              |        | 1,967              |  
|                                  | Preferred unit dividends                                     |                       |                          | (782                   | ) |                            |        |              |        |                    |  
|                                  |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Net income applicable to unitholders                         |                       | $                        | 9,546                  |   | $                          | 4,342  |              | $      | 1,967              |  
|                                  |                                                              |                       |                          |                        |   |                            |        |              |        |                    |  

12

---

Consolidating Statement of Operations
For the Six Months Ended June 30, 2002
(in thousands)

|                                  |                                                            | RFS
Partnership, L.P. |                          | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |        | Eliminations |        | Total
Consolidated |  
|--------------------------------- | ---------------------------------------------------------- | --------------------- | ------------------------ | ---------------------- | - | -------------------------- | ------ | ------------ | ------ | ------------------ | -
|Revenue:                          |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Rooms                                                      |                       |                          |                        |   | $                          | 57,961 |              | $      | 29,105             |  
|                                  | Food and beverage                                          |                       |                          |                        |   |                            | 6,232  |              |        | 2,645              |  
|                                  | Other operating departments                                |                       |                          |                        |   |                            | 1,859  |              |        | 1,477              |  
|                                  | Lease revenue                                              |                       | $                        | 14,338                 |   |                            | 10,807 |              |        | 1,325              |  
|                                  | Deferred revenue                                           |                       |                          | (740                   | ) |                            |        |              |        | (763               | )
|                                  | Other                                                      |                       |                          | 514                    |   |                            | 22     |              |        | 93                 |  
|                                  |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  |                                                            |                       | Total hotel revenue      |                        |   | 14,112                     |        |              | 76,881 |                    |  
|                                  |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|Hotel operating expenses:         |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Rooms                                                      |                       |                          |                        |   |                            | 11,893 |              |        | 5,645              |  
|                                  | Food and beverage                                          |                       |                          |                        |   |                            | 4,827  |              |        | 1,680              |  
|                                  | Other operating departments                                |                       |                          |                        |   |                            | 657    |              |        | 282                |  
|Undistributed operating expenses: |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Property operating costs                                   |                       |                          |                        |   |                            | 7,554  |              |        | 3,225              |  
|                                  | Property taxes, insurance and other                        |                       |                          | 1,752                  |   |                            | 1,837  |              |        | 2,944              |  
|                                  | Franchise costs                                            |                       |                          | (91                    | ) |                            | 5,133  |              |        | 3,188              |  
|                                  | Maintenance and repair                                     |                       |                          |                        |   |                            | 3,285  |              |        | 1,530              |  
|                                  | Management fees                                            |                       |                          |                        |   |                            | 1,661  |              |        | 867                |  
|                                  | Percentage lease expense                                   |                       |                          |                        |   |                            | 23,602 |              |        |                    |  
|                                  | Depreciation                                               |                       |                          | 5,075                  |   |                            | 3,590  |              |        | 6,268              |  
|                                  | Amortization of franchise fees and unearned compensation   |                       |                          | 604                    |   |                            | 21     |              |        | 13                 |  
|                                  | General and administrative                                 |                       |                          | 304                    |   |                            | 5,420  |              |        | 4,084              |  
|                                  |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  |                                                            |                       | Total operating expenses |                        |   | 7,644                      |        |              | 69,480 |                    |  
|                                  |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Operating income                                           |                       |                          | 6,468                  |   |                            | 7,401  |              |        | 4,156              |  
|                                  | Amortization of loan origination costs                     |                       |                          | 613                    |   |                            | 14     |              |        | 150                |  
|                                  | Debt extinguishment and swap termination costs             |                       |                          | 3,210                  |   |                            | 6,912  |              |        |                    |  
|                                  | Interest expense                                           |                       |                          | 5,238                  |   |                            | 1,259  |              |        | 6,426              |  
|                                  | Equity in loss of consolidated subsidiaries                |                       |                          | 2,837                  |   |                            |        |              |        | 600                |  
|                                  |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Loss before (gain) loss on sale of assets and income taxes |                       |                          | (5,430                 | ) |                            | (784   | )            |        | (3,020             | )
|                                  | (Gain) loss on sale of assets                              |                       |                          | (975                   | ) |                            |       |              |        | 13                 |  
|                                  | Provision for (benefit from) income taxes                  |                       |                          |                        |   |                            | (368   | )            |        | (12                | )
|                                  |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Net loss                                                   |                       |                          | (4,455                 | ) |                            | (416   | )            |        | (3,021             | )
|                                  | Preferred unit dividends                                   |                       |                          | (1,562                 | ) |                            |        |              |        |                    |  
|                                  | Loss on redemption of Preferred Units                      |                       |                          | (1,890                 | ) |                            |        |              |        |                    |  
|                                  |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  
|                                  | Net loss applicable to unitholders                         |                       | $                        | (7,907                 | ) | $                          | (416   | )            | $      | (3,021             | )
|                                  |                                                            |                       |                          |                        |   |                            |        |              |        |                    |  

13

---

Consolidating Statement of Operations
For the Six Months Ended June 30, 2001
(in thousands)

|                                  |                                                          | RFS
Partnership, L.P. |                          | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |         | Eliminations |         | Total
Consolidated |  
|--------------------------------- | -------------------------------------------------------- | --------------------- | ------------------------ | ---------------------- | - | -------------------------- | ------- | ------------ | ------- | ------------------ | -
|Revenue:                          |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|                                  | Rooms                                                    |                       |                          |                        |   | $                          | 65,612  |              | $       | 36,457             |  
|                                  | Food and beverage                                        |                       |                          |                        |   |                            | 6,622   |              |         | 2,715              |  
|                                  | Other operating departments                              |                       |                          |                        |   |                            | 2,840   |              |         | 2,149              |  
|                                  | Lease revenue                                            |                       | $                        | 18,220                 |   |                            | 12,286  |              |         | 1,442              |  
|                                  | Deferred revenue                                         |                       |                          | (833                   | ) |                            |         |              |         | (903               | )
|                                  | Other                                                    |                       |                          | 457                    |   |                            | 86      |              |         | 166                |  
|                                  |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|                                  |                                                          |                       | Total hotel revenue      |                        |   | 17,844                     |         |              | 87,446  |                    |  
|                                  |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|Hotel operating expenses:         |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|                                  | Rooms                                                    |                       |                          |                        |   |                            | 12,682  |              |         | 6,777              |  
|                                  | Food and beverage                                        |                       |                          |                        |   |                            | 5,311   |              |         | 1,750              |  
|                                  | Other operating departments                              |                       |                          |                        |   |                            | 809     |              |         | 288                |  
|Undistributed operating expenses: |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|                                  | Property operating costs                                 |                       |                          |                        |   |                            | 8,052   |              |         | 3,409              |  
|                                  | Property taxes, insurance and other                      |                       |                          | 1,701                  |   |                            | 1,731   |              |         | 2,709              |  
|                                  | Franchise costs                                          |                       |                          | (132                   | ) |                            | 5,384   |              |         | 3,759              |  
|                                  | Maintenance and repair                                   |                       |                          |                        |   |                            | 3,542   |              |         | 1,656              |  
|                                  | Management fees                                          |                       |                          |                        |   |                            | 1,852   |              |         | 1,031              |  
|                                  | Percentage lease expense                                 |                       |                          |                        |   |                            | 28,631  |              |         |                    |  
|                                  | Depreciation                                             |                       |                          | 5,133                  |   |                            | 3,513   |              |         | 6,231              |  
|                                  | Lease termination                                        |                       |                          |                        |   |                            | 35,664  |              |         | 29,832             |  
|                                  | Amortization of franchise fees and unearned compensation |                       |                          | 680                    |   |                            | 21      |              |         | 15                 |  
|                                  | General and administrative                               |                       |                          | 487                    |   |                            | 5,711   |              |         | 3,894              |  
|                                  |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|                                  |                                                          |                       | Total operating expenses |                        |   | 7,869                      |         |              | 112,903 |                    |  
|                                  |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|                                  | Operating income (loss)                                  |                       |                          | 9,975                  |   |                            | (25,457 | )            |         | (19,325            | )
|                                  | Amortization of loan origination costs                   |                       |                          | 465                    |   |                            | 75      |              |         | 154                |  
|                                  | Interest expense                                         |                       |                          | 4,100                  |   |                            | 2,516   |              |         | 6,524              |  
|                                  | Equity in loss of consolidated subsidiaries              |                       |                          | 28,352                 |   |                            |         |              |         | 21,987             |  
|                                  |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|                                  | Loss before gain on sale of assets and income taxes      |                       |                          | (22,942                | ) |                            | (28,048 | )            |         | (47,990            | )
|                                  | Gain on sale of assets                                   |                       |                          |                        |   |                            |         |              |         | (1,200             | )
|                                  | Benefit from income taxes                                |                       |                          |                        |   |                            | (13,475 | )            |         | (11,024            | )
|                                  |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|                                  | Net loss                                                 |                       |                          | (22,942                | ) |                            | (14,573 | )            |         | (35,766            | )
|                                  | Preferred unit dividends                                 |                       |                          | (1,562                 | ) |                            |         |              |         |                    |  
|                                  | Gain on redemption of Series A preferred units           |                       |                          | 5,141                  |   |                            |         |              |         |                    |  
|                                  |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  
|                                  | Net loss applicable to unitholders                       |                       | $                        | (19,363                | ) | $                          | (14,573 | )            | $       | (35,766            | )
|                                  |                                                          |                       |                          |                        |   |                            |         |              |         |                    |  

14

---

Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2002
(in thousands)

|                                                 |  | LP Only |         | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |   | Total
Consolidated |        
|------------------------------------------------ |  | ------- | ------- | ---------------------- | - | -------------------------- | - | ------------------ | -------
|Cash flows from (used in) operating activities   |  | $       | 28,965  |                        | $ | 1,973                      |   | $                  | (11,713
|Cash flows from (used in) investing activities   |  |         | (72,474 | )                      |   | 56,576                     |   |                    | 13,805 
|Cash flows from (used in) financing activities   |  |         | 47,035  |                        |   | (58,191                    | ) |                    | (1,238 
|                                                 |  |         |         |                        |   |                            |   |                    |        
|Net increase in cash and cash equivalents        |  |         | 3,526   |                        |   | 358                        |   |                    | 854    
|Cash and cash equivalents at beginning of period |  |         | 263     |                        |   | 3,467                      |   |                    | 2,005  
|                                                 |  |         |         |                        |   |                            |   |                    |        
|Cash and cash equivalents at end of period       |  | $       | 3,789   |                        | $ | 3,825                      |   | $                  | 2,859  
|                                                 |  |         |         |                        |   |                            |   |                    |        

Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2001
(in thousands)

|                                                 |  | LP Only |         | Guarantor
Subsidiaries |   | Non-Guarantor
Subsidiaries |   | Total
Consolidated |        
|------------------------------------------------ |  | ------- | ------- | ---------------------- | - | -------------------------- | - | ------------------ | -------
|Cash flows from (used in) operating activities   |  | $       | (1,444  | )                      | $ | (21,770                    | ) | $                  | 15,080 
|Cash flows from (used in) investing activities   |  |         | (23,005 | )                      |   | (3,672                     | ) |                    | 27,109 
|Cash flows from (used in) financing activities   |  |         | 26,207  |                        |   | 33,801                     |   |                    | (37,944
|                                                 |  |         |         |                        |   |                            |   |                    |        
|Net increase in cash and cash equivalents        |  |         | 1,758   |                        |   | 8,359                      |   |                    | 4,245  
|Cash and cash equivalents at beginning of period |  |         | 1,049   |                        |   | 136                        |   |                    | 2,496  
|                                                 |  |         |         |                        |   |                            |   |                    |        
|Cash and cash equivalents at end of period       |  | $       | 2,807   |                        | $ | 8,495                      |   | $                  | 6,741  
|                                                 |  |         |         |                        |   |                            |   |                    |        

15

---



ITEM 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

General.RFS Partnership, L.P. (the "Partnership"), owns interests in 58 hotels with 8,424 room located in 24 states
(collectively the "Hotels") at June 30, 2002. RFS Hotel Investors, Inc. ("RFS") is the general partner and owns an approximate 92% ownership in the Partnership. At June 30, 2002,
third party limited partners own the remaining 8%.

For
the trailing twelve months ended June 30, 2002, the Partnership received 38% of its Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") from full service
hotels, 35% from extended stay hotels and 27% from limited service hotels.

The
following summarizes additional information for the 58 hotels owned at June 30, 2002:

|Franchise Affiliation   |                               | Hotel Properties |    | Rooms/Suites |       | EBITDA
Three months ended
June 30, 2002 |        | EBITDA
Six months ended
June 30, 2002
|----------------------- | ----------------------------- | ---------------- | -- | ------------ | ----- | --------------------------------------- | ------ | -------------------------------------
|Full Service Hotels:    |                               |                  |    |              |       |                                         |        |                                      
|                        | Sheraton                      |                  | 4  |              | 864   |                                         | $      | 2,825                                
|                        | Holiday Inn                   |                  | 5  |              | 954   |                                         |        | 2,138                                
|                        | Sheraton Four Points          |                  | 2  |              | 412   |                                         |        | 1,060                                
|                        | Independent                   |                  | 2  |              | 331   |                                         |        | 562                                  
|                        | Doubletree                    |                  | 1  |              | 221   |                                         |        | 593                                  
|                        | Hilton                        |                  | 1  |              | 234   |                                         |        | 600                                  
|                        |                               |                  |    |              |       |                                         |        |                                      
|                        |                               | 15               |    | 3,016        |       |                                         | 7,777  |                                      
|                        |                               |                  |    |              |       |                                         |        |                                      
|Extended Stay Hotels:   |                               |                  |    |              |       |                                         |        |                                      
|                        | Residence Inn by Marriott     |                  | 14 |              | 1,851 |                                         |        | 5,658                                
|                        | TownePlace Suites by Marriott |                  | 3  |              | 285   |                                         |        | 538                                  
|                        | Homewood Suites by Hilton     |                  | 1  |              | 83    |                                         |        | 105                                  
|                        |                               |                  |    |              |       |                                         |        |                                      
|                        |                               | 18               |    | 2,219        |       |                                         | 6,301  |                                      
|                        |                               |                  |    |              |       |                                         |        |                                      
|Limited Service Hotels: |                               |                  |    |              |       |                                         |        |                                      
|                        | Hampton Inn                   |                  | 17 |              | 2,113 |                                         |        | 3,512                                
|                        | Holiday Inn Express           |                  | 5  |              | 637   |                                         |        | 1,120                                
|                        | Comfort Inn                   |                  | 2  |              | 337   |                                         |        | 430                                  
|                        | Courtyard by Marriott         |                  | 1  |              | 102   |                                         |        | 241                                  
|                        |                               |                  |    |              |       |                                         |        |                                      
|                        |                               | 25               |    | 3,189        |       |                                         | 5,303  |                                      
|                        |                               |                  |    |              |       |                                         |        |                                      
|Total                   |                               | 58               |    | 8,424        |       | $                                       | 19,381 |                                      
|                        |                               |                  |    |              |       |                                         |        |                                      

At
June 30, 2002, the Partnership leased five hotels to two third-party lessees. Fifty-one hotels are managed by Flagstone Hospitality Management Company LLC
("Flagstone") and the remaining seven hotels are managed by four other third party management companies.

Forward-looking Statements

Certain matters discussed herein may constitute forward-looking statements. Such statements may be identified by words such as anticipate, believe, estimate,
expect, intend, predict, and hope or similar expressions. The Partnership has based these forward-looking statements on its current expectations and projections about future events and trends
affecting the financial condition of its business, which may prove to be incorrect. These forward-looking statements relate to future events, the Partnership's future financial performance, and
involve known and unknown risks, uncertainties and other factors which may cause the Partnership's actual results, performance, achievements or industry results to be

16

---

materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Future events and actual results could differ materially from those
identified or contemplated by such forward-looking statements. Important factors that could contribute to such differences are set forth herein and in the Partnership's other filings with the SEC.
Except as required by the federal securities laws, the Partnership disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in
this quarterly
report on Form 10-Q to reflect any change in the Partnership's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is
based.

Results of Operations

Comparison of the three and six months ended June 30, 2002 and June 30, 2001.

Revenue

Revenue decreased 11.2% for the quarter from $60.4 million to $53.6 million and 14.7% year to date from $118.3 million to
$100.9 million primarily due to the softness in business travel resulting from the lagging economy. For the quarter, revenue per available room declined 10.6% due to a decline in occupancy of
3.4 percentage points and a 6.3% decline in average daily rate. Revenue per available room declined 13.5% year to date due to a decline in occupancy of 5.3 percentage points and a 6.9%
decline in average daily rate. Revenue per available room has improved incrementally each quarter of 2002 with revenue per available room declining 16.6% in the first quarter and 10.6% in the second
quarter. Revenue per available room for the full service, extended stay and limited service hotel portfolios showed decreases in revenue per available room of 16.6%, 6.5% and 5.9% for the quarter, and
22.0%, 6.9% and 7.5% for the year, respectively, from the comparable 2001 period.

As
reported by Smith Travel Research, year-to-date, the San Francisco/San Mateo Metropolitan Service Area ("MSA") was the worst performing MSA in the United
States in terms of revenue per available room comparison to the prior year with a decline of approximately 28%. The Partnership's six northern California properties experienced an average decline in
quarterly and year to date revenue per available room of 27.9% and 32.3%, respectively. Excluding the six northern California properties, revenue per available room declined approximately 5.5% for the
quarter of 2002 and 7.8% year to date. Since March 2001, the northern California economy has suffered from severe declines in demand due to the downturn in the high-tech industry, a
weak convention calendar and the weak Japanese economy. Within Northern California, revenue per available room at the two San Francisco hotels has increased incrementally each month of 2002 from $56
in January to $120 in June.

The
following shows hotel operating statistics for the 58 comparable hotels for the three and six months ended June 30, 2002.

COMPARABLE HOTELS OPERATING STATISTICS
For The Three Months Ended June 30, 2002

|                |  | ADR |        | OCCUPANCY |       | Revenue Per
Available Room |     
|--------------- |  | --- | ------ | --------- | ----- | -------------------------- | ----
|
|Full Service    |  | $   | 101.98 |           | (11.6 | )%                         | 69.2
|Extended Stay   |  |     | 95.58  |           | (2.6  | )%                         | 78.8
|Limited Service |  |     | 69.61  |           | (2.0  | )%                         | 71.2
|                |  |     |        |           |       |                            |     
|Total           |  | $   | 88.10  |           | (6.3  | )%                         | 72.5
|                |  |     |        |           |       |                            |     

17

---

COMPARABLE HOTELS OPERATING STATISTICS
For The Six Months Ended June 30, 2002

|                |  | ADR |        | OCCUPANCY |       | Revenue Per
Available Room |     
|--------------- |  | --- | ------ | --------- | ----- | -------------------------- | ----
|
|Full Service    |  | $   | 101.47 |           | (13.4 | )%                         | 64.7
|Extended Stay   |  |     | 95.99  |           | (1.9  | )%                         | 78.1
|Limited Service |  |     | 70.46  |           | (1.6  | )%                         | 66.1
|                |  |     |        |           |       |                            |     
|Total           |  | $   | 88.55  |           | (6.9  | )%                         | 68.7
|                |  |     |        |           |       |                            |     

The
Partnership's full service hotels, which comprised approximately 38% of trailing twelve month EBITDA ("TTM EBITDA"), experienced an average decrease in revenue per available room of
16.6% in the quarter and 22.0% year to date. This decrease was caused by quarterly and year to date decreases in occupancy of 4.1 and 7.1 percentage points and a 11.6% and 13.4% decline in
average daily rate, respectively. The six northern California hotels previously mentioned make up a substantial portion of these decreases. Excluding the six northern California properties, revenue
per available room at the Partnership's other full service hotels declined approximately 3.4% for the quarter and 9.8% year to date. The following six full service hotels located in Silicon Valley and
San Francisco had decreases in revenue per available room averaging 27.9% and 32.3% for the three and six months ended June 30, 2002.

Hotel

Location

Three Months
Ended

Six Months
Ended173-room Sheraton

Sunnyvale, CA

(29.3
)%
(34.9
)%235-room Beverly Heritage

Milpitas, CA

(53.2
)%
(49.0
)%229-room Sheraton

Milpitas, CA

(27.4
)%
(32.1
)%214-room Sheraton Four Points

Pleasanton, CA

(16.4
)%
(22.9
)%234-room Hilton

San Francisco, CA

(13.8
)%
(20.7
)%94-room Hotel Rex

San Francisco, CA

(25.8
)%
(31.6
)%


The
Hotel Rex at Union Square has not shown the same improvement in 2002 as the Hilton Fisherman's Wharf. As such, the Partnership has decided to accelerate the timing of its
$1.5 million earthquake retro-fit and renovation to November of this year. Originally, the Partnership anticipated performing this renovation in late 2003. The work is required by
law to be performed by early 2005. The Rex will be closed from November to February of 2003.    The Partnership believes that accelerating the renovation to this slow period has enabled it
to decrease the Partnership's renovation and retro-fit costs. Similarly, the re-opening will coincide with the re-opening of the Moscone Center. The Moscone Center
is scheduled to open between December 2002 and February 2003 and the Convention and Visitors Bureau has booked business unto the Moscone Center in March 2003.

The
extended stay hotels, which comprised approximately 35% of TTM EBITDA, experienced a decline in revenue per available room of 6.5% for the quarter and 6.9% year to date. Year to date
this market segment has performed the best in terms of revenue per available room versus the prior year. Fourteen of the eighteen extended stay properties are Residence Inns by Marriott, which
experienced a decrease in revenue per available room of 6.1% for the quarter and 6.5% year to date. The Partnership believes that Residence Inns by Marriott is the extended stay brand of choice for
consumers as these hotels benefit from longer duration stays that include the typically slower weekend days. Similarly most of the extended stay portfolio, with the exception of the
176-room Residence Inn in Orlando, are in markets that can best be categorized as drive to markets. These hotels have been less affected by the events of the slowing economy and
September 11 with revenue per available room declining 4.9% for

18

---

the quarter and 5.5% year to date. The Orlando Residence Inn has experienced a decline in revenue per available room of nearly 23.1% for the quarter and 20.8% year to date.

The
limited service hotels, which comprised approximately 27% of TTM EBITDA, experienced a decrease in revenue per available room of 5.9% in the quarter and 7.5% year to date. Seventeen
of the twenty-six limited service hotels are Hampton Inns that experienced a decline in revenue per available room of 4.4% for the quarter and 4.9% year to date. These results compare
favorably to the full service and extended stay portfolio due to the lagging economy that translated into guests trading down in price points to stay at limited service hotels.

Expenses

Total operating expenses decreased $2.1 million for the quarter and $70.2 million year to date due primarily to the lease termination expense of
$65.5 million in the first and second quarters of 2001. Excluding lease termination expense for the quarter, operating margins (operating income as a percentage of total hotel revenue,
excluding the effects of deferred revenue) decreased 6.5 points to 20.2% from 26.7%, driven by the decrease in revenue of 11.1%. Excluding lease termination expense year to date, operating margins
(operating income as a percentage of total hotel revenue, excluding the effects of deferred revenue) decreased 8.1 points to 17.2% from 25.3%, driven by the decrease in revenue of 14.7%. Individual
line items comprising hotel operating expenses are discussed below.

Hotel
operating expenses for rooms, food and beverage and other operating departments decreased 7.4% to $12.9 million from $14.0 million for the quarter and 9.5% to
$25.0 million from $27.6 million year to date; however, as a percentage of total hotel revenue (excluding deferred revenue), hotel operating expenses increased to 23.9% in 2002 versus
22.9% in 2001 for the quarter and to 24.4% in 2002 versus 23.0% in 2001 for the year. The increased percentage was driven mostly by the sharp decline in revenue, as the cost reductions that were
implemented in 2001 could not fully recover the loss in revenue.

Property
operating costs decreased $0.2 million or 4.0% for the quarter due to a decrease both in energy and marketing costs of $0.1 million, respectively. Marketing
expenses have remained flat year to date.    Year to date property operating costs decreased $0.7 million or 6.0% due primarily to a decrease in energy costs of $0.5 million
or 10.9% and complimentary guest services of $0.2 million or 8.1%. Energy costs have decreased across all of our portfolio with a substantial portion of the decrease coming from our California
properties. Energy costs at the ten California properties, energy costs decreased $0.2 million or 14.5% for the year. Energy costs in California were higher in the first half of 2001 due to the
well-publicized energy crisis in that state. The decrease in complimentary guest services is attributable to the decrease in business travelers.

Property
taxes, insurance and other expenses increased $0.3 million or 9.6% for the quarter driven primarily by an increase in earthquake and property insurance of
$0.2 million and personal property taxes of $0.1 million. Year to date expenses increased $0.4 million or 6.4%, of which $0.3 million relates to an increase in insurance
costs and $0.1 million to personal property taxes.

Franchise
costs decreased $0.2 million or 5.0% for the quarter and $0.8 million or 8.7% year to date due primarily to the respective quarterly and year to date decrease in
hotel revenue of 11.1% and 14.7%, respectively.

Maintenance
and repair costs decreased $0.1 million or 4.4% for the quarter and $0.4 million or 7.4% year to date. These decreases are due to the decrease in occupancy at
our hotels of 4.5% for the quarter and 7.2% year to date.

Management
fees have decreased $0.3 million or 17.1% for the quarter and $0.4 million or 12.3% year to date due primarily to the decrease in revenues. Management fees have
remained flat at 2.4% to 2.5% of total hotel revenue in 2002 and 2001.

19

---

Depreciation
increased to $7.6 million from $7.5 million for the quarter and is up slightly for the year. The Partnership expected depreciation to level off after the
substantial capital expenditures made in prior years.

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

Amortization
of franchise fees and unearned compensation is down slightly for the quarter and down $0.1 million year to date due to the decrease in the amortization of certain
employee restricted stock awards which fully vested in October, 2001.

General
and administrative expenses are unchanged for the quarter and have decreased $0.3 million or 2.8% year to date due primarily to austerity programs implemented in the
second and third quarters of 2001 at both the hotels and corporate headquarters aimed at reducing these expenses.

Debt
extinguishment and swap termination costs of $10.1 million are comprised of a yield maintenance premium of $5.5 million to pay off the 1996 CMBS debt,
$3.2 million to terminate two interest rate swaps and $1.4 million to write-off the unamortized debt issuance costs related to the 1996 CMBS debt.

Amortization
on loan origination costs have increased $0.1 million for the quarter and year to date due to the amortization of costs associated with issuance of the
$125 million senior notes on February 26, 2002.

Interest
expense increased $0.3 million or 4.7% for the quarter due to the increase in the weighted average interest rate for the quarter on borrowings outstanding from 7.9% in
2001 to 8.7% in 2002 as well as a decrease in the weighted average borrowings outstanding of $16.3 million from $315.0 million to $298.7 million. Year to date interest expense
decreased $0.2 million or 1.7% due to the increase in the year to date weighted average interest rate from 7.9% in 2001 to 8.2% in 2002 and a decrease in the
weighted average borrowings outstanding of $14.9 million from $320.5 million in 2001 to $305.6 million in 2002.

Loss
(gain) on sale of assets relates primarily to the sale of the Partnership's interest in an unconsolidated partnership for approximately $1.1 million in the first quarter of
2002.

Benefit
from income taxes decreased $24.1 million year to date as a result of the Hilton lease termination in the first quarter of 2001.

Net income (loss) applicable to unitholders

For the quarter, net income applicable to unitholders decreased $8.3 million for the quarter from $9.5 million in 2001 to $1.2 million in
2002. The decrease is attributable to the decrease in operating income of $4.7 million, the gain on sale of assets in 2001 of $1.2 million and the loss on the redemption of the
Series B Preferred Units of $1.9 million in June, 2002. Year to date net loss applicable to unitholders was $(7.9) million and $(19.4) million in 2002 and 2001, respectively. The
$11.5 million decrease of net loss is attributable primarily to the increase in operating income of $52.8 million, offset by the decrease in benefit from income taxes of
$24.1 million, the gain on the redemption of the Series A Preferred Units in 2001 of $5.1 million, the loss on redemption of the Series B Preferred Stock in 2002 of
$1.9 million and the debt extinguishment and swap termination costs of $10.1 million in 2002.

20

---

Funds from Operations and EBITDA

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

The
following details the computation of recurring FFO for the three and six months ended June 30 (in thousands):

Three Months Ended

Six Months Ended2002

2001

2002

2001Net income (loss)

$
3,888

$
10,328

$
(4,455
)
$
(22,942
)Deferred revenue


491


457


1,503


1,736Depreciation


7,612


7,483


14,933


14,877Debt extinguishment and swap termination costs








10,122Gain on sale of assets


10


(1,200
)

(962
)

(1,200
)Hilton lease termination





600





65,496Deferred income tax provision (benefit)


130


32


(380
)

(24,499
)Preferred unit dividends


(781
)

(782
)

(1,562
)

(1,562
)Recurring FFO

$
11,350

$
16,918

$
19,199

$
31,906Weighted average units and potential dilutive units outstanding


29,676


27,474


29,013


27,452


The
following details the computation of EBITDA for the three and six months ended June 30 (in thousands):

Three Months Ended

Six Months Ended2002

2001

2002

2001Recurring FFO

$
11,350

$
16,918

$
19,199

$
31,906Interest expense


6,511


6,216


12,555


12,772Amortization


739


707


1,415


1,410Current income taxes





(52
)Preferred unit dividends


781


782


1,562


1,562EBITDA

$
19,381

$
24,571

$
34,731

$
47,650


21

---

Liquidity and Capital Resources

The Partnership's principal source of cash liquidity to meet its cash requirements, including distributions to unitholders and repayments of indebtedness, is its
cash flow. For the six months ended June 30, 2002, cash flow provided by operating activities was $19.2 million. The Partnership believes that cash provided by operating activities will
be adequate to meet some of its liquidity needs for the foreseeable future. The Partnership currently expects to fund its strategic objectives and any other liquidity needs by borrowing on its Line of
Credit, exchanging equity for hotel properties or possibly accessing the capital markets as market conditions permit. At June 30, 2002, the Partnership had $10.5 million of cash and cash
equivalents and had borrowed $9.3 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 from time to time may be less than the maximum $140 million.

The
following details the Partnership's debt outstanding at June 30, 2002 (dollar amounts in thousands):

|               |  |   |         |  |               |  |          |  |               | Collateral
|-------------- |  | - | ------- |  | ------------- |  | -------- |  | ------------- | ----------
|
|Line of Credit |  | $ | 9,250   |  | LIBOR + 200bp |  | Variable |  | July 2004     |           
|Senior Notes   |  |   | 125,000 |  | 9.75%         |  | Fixed    |  | March 2012    |           
|Mortgage       |  |   | 91,348  |  | 7.83%         |  | Fixed    |  | December 2008 |           
|Mortgage       |  |   | 18,117  |  | 8.22%         |  | Fixed    |  | November 2007 |           
|Mortgage       |  |   | 51,065  |  | 8.00%         |  | Fixed    |  | August 2010   |           
|               |  |   |         |  |               |  |          |  |               |           
|               |  | $ | 294,780 |  |               |  |          |  |               |           
|               |  |   |         |  |               |  |          |  |               |           

The
interest rate on the Line of Credit ranges from 150 basis points to 250 basis points above LIBOR, depending on the Partnership's ratio of total debt to its investment in hotel
properties (as defined). The interest rate was approximately 3.8% at June 30, 2002. 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 Partnership can obtain a release of the pledge of any hotel in the Collateral Pool if the Partnership 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 Partnership was in compliance with these covenants at June 30, 2002.

On
February 26, 2002, the Partnership sold $125 million of senior notes. The senior notes mature March 1, 2012 and bear interest at a rate of 9.75% per year, payable
semi-annually, in arrears, on March 1 and September 1 of each year, commencing on September 1, 2002. The senior notes are unsecured obligations of the Partnership and
are guaranteed by RFS and certain of its subsidiaries. The senior notes contain covenants that could, among other things, restrict RFS's ability to borrow money, pay dividends on or repurchase capital
stock, make investments, and sell assets or enter into mergers and consolidations. The Partnership was in compliance with these covenants at June 30, 2002. Net proceeds from the issuance of the
senior notes of $121.5 million were used to retire the 1996 CMBS mortgage debt on March 20, 2002 ($57.5 million outstanding), pay the prepayment penalty on the 1996 CMBS mortgage
debt of approximately $5.5 million, terminate the two outstanding interest rate swap
agreements for approximately $3.2 million, with the balance used to reduce outstanding borrowings under the line of credit. As a result of the prepayment of the 1996 CMBS debt, the Partnership
expensed $1.4 million in unamortized debt costs. See Notes 5 and 13 to the Consolidated Financial Statements for additional detail regarding the senior notes and the guarantors thereof.

22

---

The
Partnership's other borrowings are nonrecourse to the Partnership and contain provisions allowing for the substitution of collateral, upon satisfaction of certain conditions. Most of
the mortgage borrowings are repayable and subject to various prepayment penalties, yield maintenance, or defeasance obligations. At June 30, 2002, approximately 97% of the Partnership's debt is
fixed at a weighted average interest rate of 8.7%.

Future
scheduled principal payments of debt obligations at June 30, 2002 are as follows (in thousands):

Amount2002

$
1,2512003


2,6952004


12,1382005


3,1612006


3,424Thereafter


272,111$
294,780


In
addition to the above principal payment of debt obligations as of June 30, 2002, the Partnership had a $2.0 million letter of credit outstanding. The letter of credit
serves as collateral on the worker's compensation plan for the benefit of the hotel employees of Flagstone. There are no outstanding balances on the letter of credit. The Partnership is also committed
to make future payments under various operating leases that are not significant.

Certain
significant credit statistics at June 30, 2002 are as follows:



During
the six months ended June 30, 2002, the Partnership spent $4.6 million on capital improvements to its hotels. Because of the Partnership's recent decision to
retro-fit the Hotel Rex beginning in 2002 versus 2003, the Partnership now expects to spend approximately $10.5 million on capital improvements to its hotels in 2002
($9 million previously), which the Partnership is expected to fund from cash generated from operations and borrowings under the Line of Credit. In addition, the Partnership is considering
rebranding two of its hotels. The Partnership estimates the cost of rebranding these two hotels will be approximately $5 million. The rebrandings are not expected to occur in 2002.

The
Partnership 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 June 30, 2002, the Partnership had $100.5 million of borrowing availability under the line of credit excluding outstanding letters of credit. Over the
longer term, the Partnership'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 Partnership's control. If the Partnership does not generate sufficient cash flow from operations
to satisfy its debt obligations, the Partnership any may have to undertake alternative financing plans. The Partnership cannot assume that completion of any

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such alternative financing plans will be possible. The Partnership'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.

On
February 20, 2002, RFS sold 1.15 million shares of common stock and contributed the net proceeds to the Partnership in exchange for 1.15 million units. Proceeds
of approximately $14.2 million (net of $0.2 million expenses) from the sale of the common stock were used to reduce the outstanding balance on the line of credit. On June 4, 2002
RFS sold 2.0 million shares of common stock and contributed the net proceeds to the Partnership in exchange for 2.0 million common units. RFS used the net proceeds of approximately
$24.6 million, together with available cash contributed to RFS from the Partnership in exchange for 250,000 Series B Preferred Units, to repurchase all of RFS's 250,000 outstanding
shares of Series B preferred stock for an aggregate purchase price of $25,850,000. The Series B preferred stock currently pays an annual dividend of 12.5%.

The
Partnership 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
Partnership has no charter restrictions on the amount of indebtedness the Partnership may incur, the Board of Directors of the Partnership has adopted a current policy limiting the amount of
indebtedness that the Partnership will incur to an amount not in excess of approximately 45% of the Partnership's investment in hotel properties, at cost, (as defined). The Board of Directors may
change the debt policy at any time without shareholder approval.

The
Partnership intends to fund cash distributions to unitholders and limited partners principally out of cash generated from operations. The Partnership 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 the Partnership's investments are insufficient to make such distributions.

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Insurance

The Partnership has obtained property and casualty insurance with loss limits and coverages deemed reasonable by management (and as may be required by the
Partnership's lenders and franchisors). There can be no assurance that the insurance obtained will fully protect the Partnership against insurable losses (i.e., our losses may exceed our coverage
limits), that the Partnership will not incur losses from risks that are not insurable (i.e., losses from war, nuclear or biological terrorism, riots, etc.) or that are not economically insurable, or
that current coverages will continue to be available at reasonable rates. We believe that our current "all-risk" property coverages insure against certain damages from terrorism, but it is
possible that our carriers would challenge our right to coverage or the applicable limits in the event we made a claim based on a terrorist event. In July, 2002, these policies were renewed but now
contain terrorism exclusions. In that event, one or more of our lenders may require that we carry terrorism-specific insurance. We may not be able to obtain terrorism insurance, to obtain it with
policy limits and terms (including deductibles) that satisfy us or our lenders, or to obtain it at an economically justifiable price. If we cannot satisfy a lenders' insurance requirements in any
respect, including but not limited to terrorism coverage, the lender could declare a default. Depending on our access to capital, liquidity and the value of the properties securing the affected loan
in relation to the balance of the loan, a default could have a material adverse affect on our results of operations and ability to obtain future financing. Likewise, one or more large uninsured or
underinsured losses could have a material adverse affect on us. We currently believe, given our discussions with participants in the insurance markets (which are in flux and subject to frequent
change), and the nature, physical characteristics and locations of our assets, that we have customary and adequate coverages, including for certain terrorism-related losses, under our current
insurance policies.

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.

ITEM 3.Qualitative and Quantitative Disclosure about Market Risk

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

The
Partnership's operating results are affected by changes in interest rates primarily as a result of borrowing under its line of credit. If interest rates increased by 25 basis points,
quarterly and year to date interest expense would have increased by approximately $8 thousand and $15 thousand, respectively, based on balances outstanding during the three and six
months ended June 30, 2002.

The
Partnership's primary market risk exposure is to changes in interest rate as a result of its Line of Credit and long-term debt. At March 31, 2002, the Partnership
had outstanding total indebtedness of approximately $294.8 million. The Partnership's interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and cash
flows and to lower it's overall borrowing costs. To achieve this objective, the Partnership 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 Partnership does not enter into derivative or interest rate transactions for speculative purposes. Approximately 97% of the Partnership's
outstanding debt was subject to fixed rates with a weighted average interest rate of 8.7%

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at June 30, 2002. On February 26, 2002, the Partnership terminated its two interest rate swap agreements for approximately $3.2 million. The Partnership regularly reviews
interest rate exposure on its outstanding borrowings in an effort to minimize the risk of interest rate fluctuations.

The
following table provides information about the Partnership's instruments that are sensitive to changes in interest rates. For debt obligations outstanding at June 30, 2002,
the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve as
of June 30, 2002. The fair value of the Partnership's fixed rate debt indicates the estimated principal amount of debt having similar debt service requirements, which could have been borrowed
by the Partnership at June 30, 2002. The rate assumed in the fair value calculation of fixed rate debt is equal to 6.3%, which consists of the 7-year treasury of 4.3% as of
June 30, 2002, plus 200 basis points.

Expected Principal Cash Flows
(in thousands)

|Liabilities     |                       | 2002 |   | 2003  |   | 2004 |       | 2005 |       | 2006  |   | Thereafter |       | Total |   | Fair
Value
Total
|--------------- | --------------------- | ---- | - | ----- | - | ---- | ----- | ---- | ----- | ----- | - | ---------- | ----- | ----- | - | ----------------
|Long-Term Debt: |                       |      |   |       |   |      |       |      |       |       |   |            |       |       |   |                 
|                | Fixed Rate            |      | $ | 1,251 |   | $    | 2,695 |      | $     | 2,888 |   | $          | 3,161 |       | $ | 3,424           
|                | Average Interest Rate |      |   | 8.72  | % |      | 8.72  | %    |       | 8.72  | % |            | 8.72  | %     |   | 8.72            
|Variable Rate   |                       |      |   |       |   |      |       | $    | 9,250 |       |   |            |       |       |   |                 
|                | Average Interest Rate |      |   |       |   |      |       |      |       | 3.90  | % |            |       |       |   |                 

The
table incorporates only those exposures that exist as of June 30, 2002 and does not consider exposures or positions that could arise after that date. In addition, because firm
commitments are not represented in the table above, the information presented therein has limited predictive value. As a result, the Partnership's ultimate realized gain or loss with respect to
interest rate fluctuations would depend on the exposures that arise during future periods, prevailing interest rates, and the Partnership'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 Partnership's
financing requirements.

Critical Accounting Policies and Estimates

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

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

The
Partnership maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of the
Partnership's

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customers were to deteriorate, resulting in an impairment of the customers' ability to make payments, additional allowances may be required.

The
Partnership records an impairment charge when it believes an investment in hotel has been impaired such that future undiscounted cash flows would not recover the book basis of the
investment in hotel. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future.

The
Partnership records a valuation allowance to reduce the deferred tax assets to an amount that is more likely than not to be realized. While future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation allowance have been considered, in the event the Partnership were to determine that it would be able to realize its
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 the
Partnership determine that it would not be able to realize all or part of the 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.

PART IIOTHER INFORMATION

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

On
May 2, 2002, the annual meeting of shareholders was held to elect three Class III directors to serve on the RFS Board of Directors until the annual meeting of
shareholders in 2005 as well as elect PricewaterhouseCoopers LLP as the independent auditors for RFS and the Partnership for the fiscal year ending December 31, 2002.

The
shareholders voted to elect the following three directors:

|Class III Directors: |  | Votes For  |  | Votes Withheld
|-------------------- |  | ---------- |  | --------------
|Robert M. Solmson    |  | 20,783,795 |  | 3,804,493     
|R. Lee Jenkins       |  | 24,235,513 |  | 352,975       
|Karl Matthies        |  | 24,262,297 |  | 325,991       

The
following directors' terms of office continued after the meeting:

Class II
Directors (terms expiring in 2003)Michael S. Starnes, John W. Stokes, Jr. and Richard Reiss, Jr.

Class I
Directors (terms expiring in 2004)Bruce E. Campbell, Jr., H. Lance Forsdick, Sr., Randy L. Churchey

The
shareholders voted to elect PricewaterhouseCoopers with a total of 23,987,487 shares voted for, 574,940 shares voted withheld and 25,861 shares abstained from voting.

ITEM 6b.Exhibits and Reports on Form 8-K

There were no exhibits or reports on Form 8-K filed by the Partnership during the quarter ended June 30, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                    |  | RFS HOTEL INVESTORS, INC.
|------------------- |  | -------------------------
|August 14, 2002Date |  |                          

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