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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

|                                            |  |                               
|------------------------------------------- |  | ------------------------------
|For the fiscal year ended December 29, 2002 |  | Commission File Number 0-19840

SHOLODGE, INC.(Exact name of registrant as specified in its charter)

|                                                                                          |  |                                                  
|----------------------------------------------------------------------------------------- |  | -------------------------------------------------
|Tennessee(State or other jurisdiction
of incorporation or organization)                   |  | 62-1015641(I.R.S. Employer
Identification Number)
|                                                                                          |  |                                                  
|130 Maple Drive, North, Hendersonville, Tennessee(Address of principal executive offices) |  | 37075(Zip Code)                                  

Registrants telephone number, including area code (615) 264-8000

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

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

Common Stock, no par value
Rights to Acquire Series A Subordinated Preferred Stock(Title of Class)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.   Yes   x
   No   o

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).   Yes   o
   No   x

Aggregate market value of the voting stock held by non-affiliates of the
registrant on July 12, 2002, was approximately $9,500,000. The market value
calculation was determined using the last sale price of registrants common
stock on July 12, 2002, as reported on The Nasdaq Stock Market, and assumes
that all shares beneficially held by executive officers and directors of the
registrant are shares owned by affiliates, a status which each of the
officers and directors individually disclaims.

Shares of common stock, no par value, outstanding on April 4, 2003, were
5,118,778.





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TABLE OF CONTENTS



|                                                |  |  |  |  |  |  |  | 
|----------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                         
|PART II                                        
|PART III                                       
|PART IV                                        
|SIGNATURES                                     
|CERTIFICATION                                  
|CERTIFICATION                                  
|EX-10.16 AMENDMENT NO. TWO TO LOAN AND SECURITY
|EX-21 SUBSIDIARIES OF THE REGISTRANT           
|EX-23.1 CONSENT OF ERNST & YOUNG LLP           
|EX-99.1 CERTIFICATION/CEO AND CFO              



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DOCUMENTS INCORPORATED BY REFERENCE

|                  |  |                                                                                                                     
|----------------- |  | --------------------------------------------------------------------------------------------------------------------
|                  |  | Documents from which portions are                                                                                   
|Part of Form 10-K |  | incorporated by reference                                                                                           
|                  |  |                                                                                                                     
|Part III          |  | Proxy Statement for registrants annual meeting of shareholders
to be held during the second quarter of fiscal 2003.
|Part IV           |  | Registration Statement on Form S-1, Commission File No. 33-44504.                                                   
|Part IV           |  | Registration Statement on Form S-3, Commission File No. 33-77910.                                                   
|Part IV           |  | Registration Statement on Form S-8, filed with the Commission on
June 24, 1997                                      





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PART I

ITEM 1. BUSINESS.

General

The Company develops and owns and is an operator and the exclusive
franchisor of Shoneys Inns and GuestHouse Inns & Suites. In the second
quarter of 2002, the Company acquired the exclusive franchise rights of the
GuestHouse Inns & Suites hotel brand and announced its plan to convert the name
of the Shoneys Inns and Shoneys Inns & Suites hotel chain to GuestHouse
International Inns & Suites as soon as practical. As of December 29, 2002, the
Shoneys Inn /GuestHouse lodging system consisted of 118 properties containing
9,747 rooms of which six containing 686 rooms are owned by the Company.
Shoneys Inns and GuestHouse Inns & Suites are currently located in 19 states.

The Company also owns and operates five AmeriSuites hotels and is
currently negotiating for the sale of these hotels.

Shoneys Inns and GuestHouse Inns & Suites operate in the economy
limited-service segment and are designed to appeal to both business and leisure
travelers, with rooms usually priced between $40 and $65 per night. The
typical property includes 60 to 120 rooms and, in most cases, meeting rooms.
Although they do not offer full food service, most offer continental breakfast,
and most of the inns are located adjacent or in close proximity to
free-standing restaurants. Management believes that its strategy of locating
most of its inns in close proximity to free-standing restaurants has given it a
competitive advantage over many other limited-service lodging chains by
offering guest services approximating those of full-service facilities without
the additional capital expenditures, operating costs or higher room rates.

The Companys operations have been supplemented by contract revenues from
construction and development of hotels and other real estate projects for third
parties, including developments for related parties. Revenues from these
activities have varied widely from period to period, depending upon whether the
Companys construction and development activities were primarily focused on its
own facilities or on outside projects. Construction revenues are recognized on
the percentage of completion basis.

The Company also franchises and manages Shoneys Inns and GuestHouse Inns
& Suites, earning revenues from royalties, reservation services, and management
services provided to the franchisees, and reservation services provided to
other hotel chains and independent hotel operators. The Company also leases
hotels and restaurants to others, earning rental income from these third party
lessees.

The Company was incorporated under the laws of the State of Tennessee in
1976.

Growth Strategy

The Companys strategy is to increase cash flow and earnings by (i)
increasing Revenue Per Available Room (REVPAR) in Company-owned inns while
maintaining the Companys attractive room price/value relationships while
controlling operating costs,
(ii) expanding the GuestHouse Inn & Suites system through the addition of new
franchised units, (iii) utilizing the Companys experience in developing
all-suite hotels to construct and develop hotels for others, and (iv) expanding
the number of

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lodging facilities served by the Companys proprietary central
reservation center (InnLink).

Internal Growth. The Company seeks to increase cash flow and earnings from
its existing hotels through increases in REVPAR while controlling operating
costs. The Company seeks to increase REVPAR by increasing average daily room
rates and supporting or increasing occupancy rates through targeted marketing
and advertising strategies, employing promotional activities in local markets
and capitalizing on the Companys proprietary central reservation system. In
addition, the Company is committed to sustaining the quality of its properties
through an ongoing renovation and maintenance
program in order to increase REVPAR. The Company seeks to minimize costs
throughout its operations primarily through the use of an in-house development
and construction team and increased economies of scale in purchasing.

Expansion of GuestHouse Inns & Suites System. In 2002, the Company has
focused on expanding the GuestHouse Inns & Suites system principally through
the addition of new franchises and the conversion of Shoneys Inns to
GuestHouse. As of 2002 fiscal year-end, there were 118 Shoneys Inns and
GuestHouse Inns (of which 6 are Company owned) with a total of 9,747 rooms. The
Company targets existing Shoneys Inn and GuestHouse franchisees, other hotel
brand developers and contacts within the industry as potential franchisees for
additional GuestHouse Inns & Suites.

Development of Additional All-Suite Hotels. Currently, no Sumner Suites
hotels are owned, under construction, or planned for the future. The Company
has developed and opened two AmeriSuites hotels for Prime on sites that it
owned. The Company plans to continue to develop all-suite hotels for third
parties in the future as the opportunities arise.

Reservation Services. The Company provides reservation services to its
Shoneys Inn and GuestHouse franchisees and to other hotel chains and
independent hotel operators. This call center (InnLink) continues to expand
its customer base, currently serving approximately 680 hotels as compared with
approximately 550 hotels a year ago. The Company is continuing to aggressively
market this service, capitalizing on its state of the art technology.

In addition to the strategies described above, the Company may from time
to time investigate various alternatives to maximize shareholder value. These
alternatives could include, without limitation, the franchising and operation
of additional GuestHouse Inns & Suites, a sale of the remaining Company-owned
hotels, negotiating new credit arrangements, developing hotels for other
owners, the repurchase of additional shares of the Companys common stock or
outstanding debt securities, or any combination of these or other strategies,
including, as announced on January 16, 2003, the possible spin-off of its
reservation services subsidiary (InnLink) to the Companys shareholders. If
that event were to occur, each shareholder of the Company would receive shares
of common stock in a financial services company which would own InnLink as a
travel agency segment of its business.

Shoneys Inns/GuestHouse Concept

Shoneys Inns and GuestHouse Inns & Suites are limited-service hotels
positioned in the economy segment to appeal to both business and leisure
travelers and are located in 19 states in markets ranging from small towns to
larger metropolitan areas. Shoneys Inns and GuestHouse Inns & Suites are
generally located in proximity to interstate

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highways, major streets and
highways providing convenient access to business establishments. Most of the
inns are located adjacent or in close proximity to a free-standing restaurant.
Management believes that its strategy of locating its inns in close proximity
to free-standing restaurants gives it a competitive advantage over many other
limited-service lodging chains. Daily room rates range from $40 to $65 and
vary depending upon a number of factors, including location, competition and
type of room. For fiscal 2002, the average daily room rate for Company-owned
Shoneys Inns and GuestHouse Inns & Suites was $51.46.

Historically, the typical property has been a two story, exterior
corridor, brick veneer building with plate glass fronts, containing 100 to 125
rooms. Newer inns include a four story, interior corridor, brick or stucco
building containing 100 to 120 rooms as well as smaller prototype buildings
containing 80 rooms. In some cases franchisees construct smaller properties.
Each room is professionally decorated and is generally furnished with two
double beds, a dresser, table and chairs and a color television.

Amenities featured at most properties include swimming pools, meeting
rooms, facsimile machine service and continental breakfast. The Company
believes that the properties provide their guests with quality accommodations
at an attractive price/value relationship within the upper economy segment.

Construction and Development

The Companys construction subsidiary has a full time staff who manage,
supervise, control and perform the construction of hotels and other real estate
projects being developed by the Company or for third parties. Subcontractors
are employed by the Company for most of the major construction components of
hotels and other buildings, including electrical and mechanical work. The
Company intends to continue to build hotels and other structures for third
parties. The Company believes that its construction experience and its
relationship with many subcontractors will facilitate the effective development
of additional real estate projects.

The Company devotes significant resources to the identification and
evaluation of potential sites for hotels. The Company has typically targeted
markets with populations of 500,000 or more that have high levels of business
development and multiple sources of room demand. The site selection process
focuses on the competitive environment, including room and occupancy rates and
proximity to business parks, office buildings, and other demand generators. The
Companys franchisees focus on sites for their inns in proximity to interstate
highway access roads and major streets and highways providing convenient access
to local business establishments and tourist attractions.

The construction phase of a hotel generally requires six months after the
selection and acquisition of the site and all approvals and permits have been
obtained. The Companys experience in selection and acquisition of sites has
varied and generally averages six months. The approval and permitting phase can
occur simultaneously with site acquisition and generally requires three months.
The entire development process generally ranges from 10 to 12 months, but may
take longer.

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Sales and Marketing

The Company directs marketing efforts on behalf of its Company-owned inns
primarily to business travelers, whom management believes have represented the
largest segment of its customers in recent years.

Key to the success of the Shoneys Inn and GuestHouse Inn & Suites chains
is the Franchise Service Manager Program. Currently three Franchise Service
Managers (FSM) provide sales direction and hands-on assistance to all inns
with the goal of helping them achieve their properties financial, guest
service and operational goals. Each FSM takes personal ownership of the
properties in his/her region and provides assistance through regular property
visits and constant phone communications.

The Director of Marketing directs the FSM program and oversees management
of the national advertising fund, into which all Shoneys Inns pay 1% of
revenue to support national marketing efforts such as the FSM program, the
publications of the annual Vacation and Travel Directory and Group Tour Guide,
participation in travel shows and targeted niche advertising. GuestHouse Inns &
Suites pay up to $0.50 per available room per day for these services.

Programs designed to target the primary markets of business travelers and
mature leisure travelers provide brand recognition. The Company attempts to
capitalize on the brand name recognition in the over 50-age group with the Any
Senior program which provides a 10% discount on the standard room rate to any
traveler age 55 or older.

The Company annually publishes a Shoneys Inn/GuestHouse system directory
showing for each inn, its address and telephone number, location as indicated
on a locator map, a brief description of the facilities, services and amenities
provided and other relevant information such as proximity to area attractions,
businesses and restaurants. These directories are distributed in each inn and
state travel centers and are provided directly to travel agents, sponsors of
group tours, corporate travel departments and other selected potential
customers.

The Company also maintains comprehensive on line directories with
reservations booking capabilities at www.shoneysinn.com and
www.guesthouseintl.com.

Travel Agents. The Company has a policy of paying travel agents a
commission, standard in the hotel industry, on all revenue booked by them. The
Company, with respect to both owned and franchised inns, has joined the
TACS-Lite Program administered by Perot Systems. TACS-Lite (Travel Agent
Commission Settlement) is a program where each hotel property reports to the
Company each week by fax (or by electronic transmission if capable) all of its
room sales generated through travel agents. The Company in turn forwards this
information to Perot Systems which automatically generates checks each month to
travel agents across the country for the total commissions earned. The Company
believes that travel agents are more likely to book guests into a property
knowing that their commissions will be paid by Perot Systems without the travel
agent having to go to the trouble and expense of billing each separate
location.

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Lodging Operations

Hotel Management.Overall hotel operations are the responsibility of the
Director of Hotel Operations. The hotels are further managed by regional
managers, who directly supervise the general manager of each property. The
general manager of each hotel is fully responsible for day-to-day operations
and is compensated by salary and bonus systems which reward revenue and
operating margin performance. Each general manager, in conjunction with senior
management, develops the propertys operating budget and is held accountable
for meeting the goals and objectives of the hotel.

Reservation System.The Companys proprietary central reservation system,
InnLink, provides important support for the room reservation process for
Shoneys Inns and GuestHouse Inns & Suites and is marketed to other chains as
well. Other chains that contract with the Company for the service include
Baymont Inns & Suites, Key West Inns and Wilson Inns & Hotels. InnLink operates
24 hours a day, 7 days a week. The InnLink system may be accessed by individual
travelers as well as by travel agents, tour and group booking agents at
1-800-552-4667. Electronically, InnLink is accessed through numerous global
distribution systems (e.g., SABRE Travel Information Network, Galileo
International, Amadeus and WorldSpan). The reservation system includes
specially designed hotel reservation software, with adequate capacity, and
state of the art hardware and telecommunications devices.

Quality Control.To ensure quality and consistency, the Company regularly
inspects each of its company owned and/or operated hotels and each hotel in the
Shoneys Inn and GuestHouse Inn franchise systems for compliance with facility
and service standards. Generally, in addition to its ongoing refurbishment
activities, the Company fully renovates each of the Company-owned inns after
approximately seven years of operation.

Training.The Company utilizes the services of an opening team to assist
with hiring and training new staff and opening new Company-owned hotels. The
opening team trains local hotel personnel in front desk operations, operational
policies, hotel accounting and cash handling procedures, record-keeping,
housekeeping and laundry, maintenance and repair, marketing, personnel
management, purchasing, quality assurance and sales. Sales training includes a
team of direct sales personnel that assists the local staff in the actual
pre-selling of rooms. An opening team generally remains on site for one to four
weeks depending on the prior experience of the local general manager.

Franchise Operations

Franchise Sales.The Company markets the GuestHouse franchise principally
to existing Shoneys Inn and GuestHouse franchisees, other hotel brand
developers and other prospects known through managements contacts in the
lodging industry. The
Company employs two full-time licensed franchise salesmen. The Company
also markets franchises through advertisements in trade publications and
participation in trade shows and franchising conventions. The Company no longer
markets the Shoneys Inns franchises.

Management believes that the Company attracts potential new franchisees by

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offering a comparable level of franchisee support services at a lower price
than its competitors. Management periodically monitors the initial fee, royalty
fee, advertising fee, reservation fee and other charges imposed by other
franchisors with whom the Company competes and believes that the fees charged
by the Company are competitive and, in most cases, lower than such other
franchisors.

Fees.Under the standard GuestHouse franchise arrangement offered to
prospective franchisees, a potential franchisee pays a $2,500 application fee.
Upon approval of the application, the Company and the franchisee enter into a
5-year license agreement, and the franchisee generally pays a license fee equal
to the greater of $250 per room or $15,000. The application fee is applied
against the license fee.

Under the standard GuestHouse franchise arrangement offered to prospective
franchisees, the franchisee pays monthly royalties of $1.25 per available room
per day during the term of the license agreement. Additionally, a marketing
cooperative fee of $0.30 per available room per day and a fee for participation
in the central reservation system are charged at 8% of revenue generated by
voice communications and 5% of revenue generated by electronic communication
plus $5.00 per reservation.

Franchisee Services.Management believes that the support the Company
offers to franchisees is a significant factor in determining its success as a
franchisor and that the Companys successful record as a builder, owner and
operator evidences valuable experience and abilities which can enhance the
franchisee support function. As franchisor, the Company draws on its own
operational experience to assist franchisees.

Once an inn is constructed, the Company requires the franchisee to send
the site general manager to a management training class conducted by the
Company covering topics including human resources, sales and marketing, yield
management and cost controls. Currently, the Company does not charge for the
training program but reserves the right to do so in the future.

The Company inspects every franchised inn at least three times a year, at
least two of which are unannounced, through its Quality Standards and
Compliance program, using trained field representatives. The Company encourages
franchisees to renovate each of the properties after approximately seven years
of operations, in the same manner that the Company renovates its own hotels.

The Company offers to provide management services to franchisees pursuant
to contractual arrangements. The Companys fee for these services is a
percentage of the managed hotels gross revenues. Currently, the Company
manages eighteen hotels under contract arrangement.

Lodging Industry

Smith Travel Research divides lodging chains into various segments based
on price. Shoneys Inns and GuestHouse Inns & Suites are included in the
economy segment.

The following tables illustrate certain comparative information regarding
REVPAR and its components for the years indicated:

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|                                       |  |        |       |                |  |               |       |      |  |      |       |      |  |         |      |               |  |      |      |   |  |  |      |   |  |   |       |  |  |   |       |  |  |   |       | 
|-------------------------------------- |  | ------ | ----- | -------------- |  | ------------- | ----- | ---- |  | ---- | ----- | ---- |  | ------- | ---- | ------------- |  | ---- | ---- | - |  |  | ---- | - |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                       |  |        |       |                |  |               |       |      |  |      |       |      |  | Average |      | Average Daily
|                                       |  |        |       |                |  |               |       |      |  |      |       |      |  |         |      |              
|                                       |  | REVPAR |       | Occupancy Rate |  | Room Rate (1)
|                                       |  |        |       |                |  |              
|                                       |  | 2000   |       | 2001           |  | 2002          |       | 2000 |  | 2001 |       | 2002 |  | 2000    |      | 2001          |  | 2002
|                                       |  |        |       |                |  |               |       |      |  |      |       |      |  |         |      |               |  |     
|Industry-wide                          |  | $      | 54.13 |                |  | $             | 50.99 |      |  | $    | 49.24 |      |  |         | 63.5 | %             |  |      | 60.1 | % |  |  | 59.2 | % |  | $ | 85.24 |  |  | $ | 84.85 |  |  | $ | 83.15 | 
|Economy segment                        |  |        | 30.68 |                |  |               | 30.47 |      |  |      | 25.65 |      |  |         | 58.5 |               |  |      | 56.2 |   |  |  | 54.2 |   |  |   | 52.44 |  |  |   | 54.22 |  |  |   | 47.83 | 
|All Shoneys Inns                      |  |        | 25.32 |                |  |               | 24.56 |      |  |      | 23.53 |      |  |         | 50.6 |               |  |      | 49.9 |   |  |  | 48.4 |   |  |   | 50.00 |  |  |   | 49.26 |  |  |   | 48.65 | 
|Company-owned Shoneys
Inns/GuestHouse |  |        | 23.41 |                |  |               | 26.83 |      |  |      | 22.87 |      |  |         | 46.5 |               |  |      | 53.3 |   |  |  | 44.4 |   |  |   | 50.31 |  |  |   | 51.69 |  |  |   | 51.46 | 



|(1) |  | Room revenues divided by the number of rented rooms.
|--- |  | ----------------------------------------------------



|Source: |  | Smith Travel Research, Standard Historical Trend Report for years ended
2000, 2001 and 2002, for industry wide and the economy segment, and the
Companys internal data for all Shoneys Inns and GuestHouse Inns & Suites
statistics.
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Competition

The lodging industry is highly competitive. In franchising the GuestHouse
brand and managing its own lodging facilities, the Company encounters
competition from numerous lodging companies, many of which have greater
industry experience, name recognition, and financial and marketing resources
than the Company. While the actual competition for individual lodging
facilities varies by location, the primary competition for GuestHouse Inns &
Suites includes lodging chains such as Holiday Inn Express, La Quinta, Comfort
Inns, Drury Inns, Fairfield Inns and Travelodge. Each of the Companys hotels
is located in a developed area that includes competing lodging facilities, and
the Company expects that most of its future hotels which it constructs will be
located in similar areas. Management believes that the principal competitive
factors in its lodging operations are room rates, quality of accommodations,
name recognition, supply and availability of alternative lodging facilities,
service levels, reputation, reservation systems and convenience of location. In
its franchising operations, the principal competitive factors are fee structure
and support services. Management further believes that the Company is presently
competitive in all these respects.

Government Regulation

The Company is subject to various federal, state and local laws,
regulations and administrative practices affecting its business. The Companys
lodging operations must comply with provisions relating to health, sanitation
and safety standards, equal employment, minimum wages, building codes and
zoning ordinances, and licenses to operate lodging facilities. The sale of
franchises is regulated by various state laws as well as by the Federal Trade
Commission (FTC) Rules on Franchising. The FTC requires that franchisors make
extensive disclosure to prospective franchisees but does not require
registration. A number of states require registration or disclosure in
connection with franchise offers and sales. In addition, several states have
franchise relationship laws that limit the ability of franchisors to
terminate franchise agreements or to withhold consent to the renewal or
transfer of these agreements.

Federal and state environmental regulations are not expected to have a
material effect on the Companys operations, but more stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors could

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delay construction of lodging facilities and add to
their cost. A significant portion of the Companys personnel are paid at rates
related to federal minimum wages and, accordingly, increases in the minimum
wage could adversely affect the Companys operating results.

The Americans with Disabilities Act prohibits discrimination on the basis
of disability in public accommodations and employment. The Company currently
designs its lodging facilities to be accessible to the disabled and believes
that it is in substantial compliance with all current applicable regulations
relating to accommodations for the disabled. The Company intends to comply with
future regulations
relating to accommodating the needs of the disabled.

Service Marks

The Company owns the right to use the GuestHouse Inns & Suites service
marks in its lodging operations. The Company believes that its ability to use
the GuestHouse mark is material to its business. The Company has registered the
service mark InnLink, which it uses in connection with its reservation
system, with the United States Patent and Trademark Office. The Company has
registered the service mark Raylogic which it uses in connection with
computer game software, with the United States Patent and Trademark Office.

Insurance

The Company maintains general liability insurance and property insurance
for all its locations and operations, as well as specialized coverage,
including guest property and liquor liability insurance, in connection with its
lodging business. The costs of insurance coverage and the availability of
liability insurance coverage have varied widely in recent years. While the
Company believes that its present insurance coverage is adequate for its
current operations, there can be no assurance that the coverage is sufficient
for all future claims or will continue to be available in adequate amounts or
at a reasonable cost.

Employees

As of December 29, 2002 the Company had approximately 420 employees,
including approximately 230 in the Companys corporate headquarters. The
Companys employees are not represented by a labor union. The Company considers
its relationships with employees to be good.

ITEM 2. PROPERTIES.

The Companys corporate headquarters, owned by the Company, is located in
Hendersonville, Tennessee and contains approximately 42,000 square feet of
space including storage and employee cafeteria. Management believes that its
corporate headquarters building contains sufficient space to accommodate the
Companys currently anticipated needs.

Four of the five Company-owned GuestHouse Inns & Suites, the Company owned
Shoneys Inn, the two Company-owned and operated AmeriSuites hotels, and, the
three AmeriSuites hotels leased to another hotel operator, at December 29,
2002, are located

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on sites owned by the Company either directly or through
subsidiaries. The remaining GuestHouse Inn & Suites is located on a site that
is leased pursuant to a long-term lease involving both the land and
improvements. The four Company-owned and operated GuestHouse Inns & Suites
include two Inns containing 245 guest rooms located in Houston, Texas, one
118-room Inn in Mobile, Alabama, and one 110-room Inn in Gulfport, Mississippi.
The 115-room Company-owned and operated Shoneys Inn is located in Houston,
Texas. One of the Company-owned and operated AmeriSuites hotels is located in
Albuquerque, New Mexico and the other one is located in Alpharetta, Georgia.
The three AmeriSuites hotels owned by the Company and leased to another
operator at December 29,2002 are all located in Texas, one each in Dallas,
Houston and San Antonio.

ITEM 3. LEGAL PROCEEDINGS.

The Company is subject to litigation from time to time in the ordinary
course of its business. The Company is not aware of any legal action pending or
threatened against it that would have a material impact on the consolidated
financial position or results of operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.

No matters were submitted to a vote of security holders in the fourth quarter
of 2002.

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PART II

ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS.

The Companys Common Stock is traded in the over-the-counter market and is
quoted on The Nasdaq Stock Market (NASDAQ) under the symbol LODG. The
prices set forth below reflect the high and low sales prices for the Companys
Common Stock as reported by NASDAQ for the periods indicated.

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal 2001    |  | High |      | Low
|               |  |      |      |    
|First Quarter  |  | $    | 5.38 |     |  | $ | 4.63 | 
|Second Quarter |  |      | 5.78 |     |  |   | 4.75 | 
|Third Quarter  |  |      | 6.25 |     |  |   | 3.83 | 
|Fourth Quarter |  |      | 6.00 |     |  |   | 3.83 | 

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal 2002    |  | High |      | Low
|               |  |      |      |    
|First Quarter  |  | $    | 5.98 |     |  | $ | 5.32 | 
|Second Quarter |  |      | 6.00 |     |  |   | 4.10 | 
|Third Quarter  |  |      | 5.29 |     |  |   | 4.10 | 
|Fourth Quarter |  |      | 4.75 |     |  |   | 3.30 | 

|                                      |  |      |      |     |  |   |      | 
|------------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal 2003                           |  | High |      | Low
|                                      |  |      |      |    
|First Quarter (through April 4, 2003) |  | $    | 4.40 |     |  | $ | 2.57 | 

On April 4, 2003, the last reported sale price for the Companys Common
Stock as reported by NASDAQ was $4.40 per share. As of April 4, 2003, there
were approximately 41 holders of record of the Companys Common Stock and
approximately 591 beneficial owners.

The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its earnings to finance future
development of its business, and therefore does not anticipate paying any cash
dividends in the foreseeable future. The Companys primary revolving credit
agreement prohibits the payment of dividends without the lenders consent.

ITEM 6. SELECTED FINANCIAL DATA.

The selected financial data set forth on the following page as of and for
each of the five fiscal years in the period ended December 29, 2002 have been
derived from the Companys audited Consolidated Financial Statements. The
Consolidated Financial Statements for each of the three fiscal years in the
period ended December 29, 2002, which have been audited by independent
auditors, are included elsewhere in this Report. The information set forth on
the following page should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations and the
Companys Consolidated Financial Statements and the related notes thereto
included elsewhere in this Report.

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SHOLODGE, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(amounts in thousands except for per share data)

|                                                                                      |                                                  |                         |        |                   |        |          |        |          |        |          |        |          |        |  |       |        |        |  |         |        |        | 
|------------------------------------------------------------------------------------- | ------------------------------------------------ | ----------------------- | ------ | ----------------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ |  | ----- | ------ | ------ |  | ------- | ------ | ------ | 
|                                                                                      |                                                  |                         |        | Fiscal Year Ended
|                                                                                      |                                                  |                         |        |                  
|                                                                                      |                                                  |                         |        | Dec. 27,          |        | Dec. 26, |        | Dec. 31, |        | Dec. 30, |        | Dec. 29,
|                                                                                      |                                                  |                         |        | 1998              |        | 1999     |        | 2000     |        | 2001     |        | 2002    
|                                                                                      |                                                  |                         |        |                   |        |          |        |          |        |          |        |         
|Revenues:                                                                             |                                                  |                         |        |                   |        |          |        |          |        |          |        |          |        |  |       |        |        |  |         |       
|                                                                                      | Hotel                                            |                         | $      | 62,413            |        |          | $      | 60,301   |        |          | $      | 40,678   |        |  | $     | 7,783  |        |  | $       | 8,873  |       
|                                                                                      | Franchising, reservation and management          |                         |        | 3,119             |        |          |        | 4,152    |        |          |        | 3,606    |        |  |       | 3,971  |        |  |         | 6,083  |       
|                                                                                      | Construction and development  related parties   |                         |        |                  |        |          |        |         |        |          |        | 115      |        |  |       | 35     |        |  |         | 5,688  |       
|                                                                                      | Construction and development  other             |                         |        | 81                |        |          |        | 11,234   |        |          |        | 11,922   |        |  |       | 27,445 |        |  |         | 4,224  |       
|                                                                                      | Rent income                                      |                         |        | 532               |        |          |        | 483      |        |          |        | 1,955    |        |  |       | 3,468  |        |  |         | 3,398  |       
|                                                                                      | Other income                                     |                         |        | 30                |        |          |        | 360      |        |          |        | 49       |        |  |       | 336    |        |  |         | 67     |       
|                                                                                      |                                                  |                         |        |                   |        |          |        |          |        |          |        |          |        |  |       |        |        |  |         |       
|                                                                                      |                                                  | Total revenues          |        |                   | 66,175 |          |        |          | 76,530 |          |        |          | 58,325 |  |       |        | 43,038 |  |         |        | 28,333 | 
|Costs and expenses:                                                                   |                                                  |                         |        |                   |        |          |        |          |        |          |        |          |        |  |       |        |        |  |         |       
|                                                                                      | Hotel                                            |                         |        | 40,133            |        |          |        | 41,580   |        |          |        | 29,554   |        |  |       | 5,857  |        |  |         | 7,108  |       
|                                                                                      | Franchising, reservation and management          |                         |        | 2,393             |        |          |        | 2,420    |        |          |        | 2,460    |        |  |       | 2,192  |        |  |         | 4,276  |       
|                                                                                      | Construction and development                     |                         |        | 71                |        |          |        | 9,826    |        |          |        | 12,571   |        |  |       | 25,692 |        |  |         | 12,119 |       
|                                                                                      | Rent expense                                     |                         |        | 9,838             |        |          |        | 13,530   |        |          |        | 10,333   |        |  |       | 582    |        |  |         | 584    |       
|                                                                                      | General and administrative                       |                         |        | 6,311             |        |          |        | 6,340    |        |          |        | 5,010    |        |  |       | 5,860  |        |  |         | 7,983  |       
|                                                                                      | Depreciation and amortization                    |                         |        | 6,702             |        |          |        | 5,803    |        |          |        | 4,501    |        |  |       | 3,392  |        |  |         | 3,336  |       
|                                                                                      | Write-off of pre-development costs               |                         |        |                  |        |          |        |         |        |          |        |         |        |  |       |       |        |  |         | 1,864  |       
|                                                                                      | Write-off of construction contracts receivable   |                         |        |                  |        |          |        |         |        |          |        |         |        |  |       |       |        |  |         | 3,631  |       
|                                                                                      | Write-off of accounts receivable                 |                         |        |                  |        |          |        |         |        |          |        |         |        |  |       |       |        |  |         | 1,297  |       
|                                                                                      | Write-off of goodwill                            |                         |        |                  |        |          |        |         |        |          |        |         |        |  |       |       |        |  |         | 2,387  |       
|                                                                                      | Write-off of trademarks and franchise rights     |                         |        |                  |        |          |        |         |        |          |        |         |        |  |       |       |        |  |         | 4,421  |       
|                                                                                      | Write-down of notes receivable                   |                         |        |                  |        |          |        |         |        |          |        |         |        |  |       |       |        |  |         | 21,167 |       
|                                                                                      | Impairment of real estate                        |                         |        |                  |        |          |        |         |        |          |        |         |        |  |       |       |        |  |         | 644    |       
|                                                                                      |                                                  |                         |        |                   |        |          |        |          |        |          |        |          |        |  |       |        |        |  |         |       
|                                                                                      |                                                  | Total cost and expenses |        |                   | 65,448 |          |        |          | 79,499 |          |        |          | 64,429 |  |       |        | 43,575 |  |         |        | 70,817 | 
|                                                                                      |                                                  |                         |        |                   |        |          |        |          |        |          |        |          |        |  |       |        |        |  |         |       
|Operating earnings (loss)                                                             |                                                  |                         | 727    |                   |        |          | (2,969 | )        |        |          | (6,104 | )        |        |  | (537  | )      |        |  | (42,484 | )     
|                                                                                      | Gain on sale of property and leasehold interests |                         |        | 20,510            |        |          |        | 15,017   |        |          |        | 4,901    |        |  |       | 3,761  |        |  |         | 628    |       
|                                                                                      | Gain on sale of available-for-sale securities    |                         |        |                  |        |          |        |         |        |          |        |         |        |  |       |       |        |  |         | 315    |       
|                                                                                      | (Loss) gain on early extinguishment of debt      |                         |        | (1,666            | )      |          |        | 3,861    |        |          |        | 7,306    |        |  |       | 913    |        |  |         | 2,592  |       
|                                                                                      | Interest expense                                 |                         |        | (10,073           | )      |          |        | (11,847  | )      |          |        | (10,245  | )      |  |       | (8,281 | )      |  |         | (8,782 | )     
|                                                                                      | Interest income                                  |                         |        | 4,944             |        |          |        | 6,181    |        |          |        | 6,397    |        |  |       | 6,376  |        |  |         | 5,016  |       
|                                                                                      | Arbitration award                                |                         |        |                  |        |          |        |         |        |          |        |         |        |  |       |       |        |  |         | 8,900  |       
|                                                                                      |                                                  |                         |        |                   |        |          |        |          |        |          |        |          |        |  |       |        |        |  |         |       
|Earnings (loss) from continuing operations before
income taxes and minority interests |                                                  |                         | 14,442 |                   |        |          | 10,243 |          |        |          | 2,255  |          |        |  | 2,232 |        |        |  | (33,815 | )     
|Income tax (expense) benefit                                                          |                                                  |                         | (5,855 | )                 |        |          | (3,535 | )        |        |          | (1,220 | )        |        |  | (785  | )      |        |  | 8,959   |       
|Minority interests in (earnings) loss of consolidated
subsidiaries and partnerships   |                                                  |                         | (647   | )                 |        |          | (1,909 | )        |        |          | (57    | )        |        |  | (58   | )      |        |  | 179     |       
|                                                                                      |                                                  |                         |        |                   |        |          |        |          |        |          |        |          |        |  |       |        |        |  |         |       

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|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |         |       |  
|------------------------------------------- | -------------------------------------------------------- | ------------------------------------------ | ----- | ----------------- | ---- | -------- | ----- | -------- | ---- | -------- | --- | -------- | ---- | - | ----- | ------- | ---- | - | ------- | ------- | ----- | -
|                                            |                                                          |                                            |       | Fiscal Year Ended
|                                            |                                                          |                                            |       |                  
|                                            |                                                          |                                            |       | Dec. 27,          |      | Dec. 26, |       | Dec. 31, |      | Dec. 30, |     | Dec. 29,
|                                            |                                                          |                                            |       | 1998              |      | 1999     |       | 2000     |      | 2001     |     | 2002    
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |         
|Earnings (loss) from continuing operations  |                                                          |                                            | 7,940 |                   |      |          | 4,799 |          |      |          | 978 |          |      |   | 1,389 |         |      |   | (24,677 | )      
|Discontinued operations:                    |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|                                            | Operations of hotels disposed of and transferred         |                                            |       | 206               |      |          |       | (260     | )    |          |     | (400     | )    |   |       | (477    | )    |   |         | (657    | )    
|                                            | Loss on disposal and transfer of discontinued
operations |                                            |       |                  |      |          |       |         |      |          |     |         |      |   |       |        |      |   |         | (2,914  | )    
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|Net earnings (loss)                         |                                                          | $                                          | 8,146 |                   |      | $        | 4,539 |          |      | $        | 578 |          |      | $ | 912   |         |      | $ | (28,248 | )      
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|Net earnings (loss) per common share:       |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|                                            | Basic:                                                   |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |         |      
|                                            |                                                          | Earnings (loss) from continuing operations |       | $                 | 0.97 |          |       | $        | 0.74 |          |     | $        | 0.18 |   |       | $       | 0.25 |   |         | $       | (4.83 | )
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|                                            |                                                          | Net earnings (loss)                        |       | $                 | 0.99 |          |       | $        | 0.70 |          |     | $        | 0.11 |   |       | $       | 0.16 |   |         | $       | (5.52 | )
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|                                            | Diluted:                                                 |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |         |      
|                                            |                                                          | Earnings (loss) from continuing operations |       | $                 | 0.92 |          |       | $        | 0.71 |          |     | $        | 0.18 |   |       | $       | 0.25 |   |         | $       | (4.83 | )
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|                                            |                                                          | Net earnings (loss)                        |       | $                 | 0.95 |          |       | $        | 0.67 |          |     | $        | 0.10 |   |       | $       | 0.16 |   |         | $       | (5.52 | )
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|Weighted average common shares outstanding: |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|                                            | Basic                                                    |                                            |       | 8,191             |      |          |       | 6,518    |      |          |     | 5,472    |      |   |       | 5,465   |      |   |         | 5,113   |      
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|                                            | Diluted                                                  |                                            |       | 8,611             |      |          |       | 6,745    |      |          |     | 5,554    |      |   |       | 5,530   |      |   |         | 5,113   |      
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|Balance sheet data:                         |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        
|                                            | Working capital                                          |                                            | $     | (22,516           | )    |          | $     | 9,337    |      |          | $   | 4,557    |      |   | $     | 11,384  |      |   | $       | (2,656  | )    
|                                            | Total assets                                             |                                            |       | 295,001           |      |          |       | 270,314  |      |          |     | 204,631  |      |   |       | 206,587 |      |   |         | 167,279 |      
|                                            | Long-term debt and capitalized leases                    |                                            |       | 125,539           |      |          |       | 122,233  |      |          |     | 90,762   |      |   |       | 86,293  |      |   |         | 24,381  |      
|                                            | Shareholders equity                                     |                                            |       | 98,099            |      |          |       | 90,878   |      |          |     | 90,322   |      |   |       | 89,273  |      |   |         | 61,194  |      
|                                            |                                                          |                                            |       |                   |      |          |       |          |      |          |     |          |      |   |       |         |      |   |         |        

Notes to Selected Financial Data



| | (A) |  | Fluctuations in hotel revenues, hotel operating costs and expenses,
and depreciation expense are due primarily to fluctuations in the number
of hotels operated by the Company. At the end of 1998, 1999, 2000, 2001
and 2002, there were 31, 35, 7, 7, and 8 hotels, respectively, being
owned and operated by the Company. Sixteen hotels were sold in July of
1998 to a group of buyers affiliated with each other. In July of 2000,
the Company sold its operating interest in 27 hotels to Prime
Hospitality Corp. (Prime) by selling its leasehold interest in 24 of
them and leasing the remaining three to them.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (B) |  | Construction and development revenues and cost and expenses vary
widely from year to year depending upon the number of third party
construction contracts in progress. Prior to 1999, construction and
development was done primarily on the Companys own hotels. In 2002
construction and development included a significant amount earned from
related parties.                                                                                                                                                                                                                                                        
|
| | (C) |  | Rental revenues increased significantly in 2000 due to the lease of
the three hotels to Prime as discussed in (A) above, increasing rent
income by                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |     |  | approximately $3.0 million per year beginning in July of 2000.                                                                                                                                                                                                                                                                                                                             
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (D) |  | Rent expense fluctuations are due primarily to rent paid to the
landlord on 24 hotels sold and leased back in 1997, 1999, and 2000,
prior to the sale of these leasehold interests to Prime in July of 2000.
Fourteen hotels were sold and leased back in November of 1997; six
hotels were sold and leased back in June of 1999; and four hotels were
sold and leased back in May of 2000.
|
| | (E) |  | The unusually high level of gains on sales of properties in 1998 and
1999 was due to the sale of the sixteen hotels in July of 1998, a
portion of which was recognized in 1998 and the remainder in 1999 due to
the installment method of accounting required on four of the hotels sold
due to insufficient down
payments in 1998.                                                        
|
| | (F) |  | Losses in 1998 on early extinguishments of debt were in connection
with the sale of hotels. The gains in 1999, 2000, 2001 and 2002 were
due primarily to the Companys repurchases of its outstanding public
debt at a discount.                                                                                                                                                           
|
| | (G) |  | The gains and losses from early extinguishment of debt previously
classified as extraordinary items have been reclassified to conform with
the provisions of SFAS No. 145, which was early adopted by the Company
at the beginning of fiscal 2002.                                                                                                                                         
|
| | (H) |  | This table reclassifies the operations of seven hotels sold or
transferred in 2002 to discontinued operations for all periods
presented.                                                                                                                                                                                                                                                   

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

The Company derives revenue from hotel room sales at its Sumner Suites
hotels (through July 9, 2000) and Company-owned Shoneys Inn and GuestHouse
Inns & Suites hotels. The Company also receives management fees for services it
performs for eighteen franchised Shoneys Inns and GuestHouse Inns & Suites
hotels. The Company derives additional revenue from franchise fees it receives
as the exclusive franchiser of Shoneys Inns and GuestHouse Inns & Suites
hotels. On May 2, 2002, the Company became the exclusive franchiser of the
GuestHouse Inns & Suites brand (GuestHouse). GuestHouse operates in the
mid-market limited service segment, with rooms typically priced between $50 and
$70 per night. The properties range in size from 21 to 180 rooms, and in most
cases, contain meeting rooms. They are designed to appeal to both business and
leisure travelers. The Company is in the process of converting all Shoneys
Inns to the GuestHouse brand. No additional Shoneys Inns will be developed or
franchised in the future. The Shoneys and GuestHouse brands will be discussed
as a combined brand due to these factors and due to the fact than many of the
Shoneys Inns (both Company-owned and operated and franchised) have already
been converted to GuestHouse.

The Companys hotel operations have historically been seasonal in nature,
reflecting higher occupancy rates during spring and summer months, which may be

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expected to cause fluctuations in the Companys quarterly revenues and earnings
from hotel operations. The Companys fiscal year ends on the last Sunday of the
calendar year.

The Companys hotel operations have been supplemented by contract revenues
from construction and development of hotels and other real estate projects for
third parties, including related parties. Revenues from these activities have
varied widely from period to period, depending upon whether the Companys
construction and development activities were primarily focused on its own
facilities or on outside projects. Construction revenues are recognized on the
percentage of completion basis.

Fourth Quarter Adjustments

The Company reported a net loss in the fourth quarter of 2002 of $27.0
million. The losses are primarily the result of write-downs of notes and
write-offs of related accounts receivable due to impaired values of hotels
underlying the receivables, losses on the sale and transfer of hotels, and
charge-offs of construction and development costs on abandoned hotel
development projects.

Approximately $21.2 million of the losses are from the write-down of 18
notes receivable totaling $67.8 million secured by first mortgages on 18 hotel
properties. Fifteen of the mortgages totaling $58.8 million are
cross-collateralized and cross-defaulted and mature on July 30, 2003. Even though all first mortgage payments
on these 15 hotels have been timely received, in late December of 2002 the
owner notified the Company that it is highly unlikely that it will be able to
refinance the properties by the notes maturity dates. Consequently, since the
Company does not desire to extend the maturity dates, the Company anticipates
that it will be necessary to resume title to the properties. The owner of the
properties agreed in late December of 2002 to transfer the hotels back to the
Company by deeds in lieu of foreclosure. In anticipation of this, the Company
began midway through the fourth fiscal quarter to find cash purchasers of the
properties in the event the Company re-acquired ownership. The Company has been
greatly disappointed in offers received recently for the fifteen hotels
securing the notes receivable. Since the Company does not desire to take back
ownership and operate the properties, it is likely to sell the properties at
values significantly below the balances of the notes receivable and has written
down the notes receivable to the estimated net sales prices of the properties.
Also, unsecured accounts receivable which related to these properties were
deemed to be uncollectible and were written off in the amount of approximately
$1.3 million in the fourth quarter.

Separately from the hotels collateralizing notes receivable discussed
above, on December 27, 2002, the Company sold one and transferred five of its
company-owned hotels on December 27, 2002, at an after-tax charge of
approximately $2.9 million. The Company transferred the five hotels for notes
receivable with a maturity of six months. Accordingly, the transaction did not
qualify as a sale and the properties will continue to be carried on the
Companys balance sheet as assets of hotels transferred under contractual
agreements (notes receivable). The buyer intends to resell the hotels. If the
buyer is unsuccessful and the hotels ultimately have to be taken back, the
Company intends to pursue other potential buyers. The $2.9 million, net of
income tax effect, is reported in discontinued operations as a loss on disposal
and transfer of discontinued businesses.

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The Company constructed two hotels for third parties from which it has
been unable to collect the balances due. One of the contracts receivable is
for approximately $2.0 million and the Company received an arbitration award of
substantially all of its claim in the fourth quarter to be paid within 30 days
of the October 30, 2002 award date. The owner of the hotel failed to pay the
award when due, and on January 3, 2003 filed Chapter 11 bankruptcy. As a
result, the Company has charged the entire balance off in the fourth quarter.
The other contract receivable is for approximately $1.0 million, and
arbitration proceedings were initiated on January 15, 2003. The owner of the
hotel claims damages in excess of the amount owed. Consequently, the Company
has charged the entire amount off in its fourth quarter. These two contracts
together resulted in a charge-off in the fourth quarter of approximately $3.0
million. Any recovery from these contracts will be recorded as earned when
received. Approximately $600,000 of other construction contracts receivable
was also charged off as uncollectible in the fourth fiscal quarter of 2002.

The Company has incurred development costs related to several sites upon
which hotel development for third parties was planned. In early 2002, the
lodging industry anticipated an economic upturn in the second half of the year.
The upturn failed to materialize. Consequently, new hotel development
opportunities eroded in late 2002 and the development opportunities on all of
these sites were lost. These development costs, which had been previously
capitalized, were charged off in the fourth quarter since none of the costs
improved the value of the land upon which they were incurred. The amount of
these charge-offs in the fourth quarter totaled approximately $1.9 million.

Related Party Transactions

On July 5, 2000, the Board of Directors accelerated the vesting of certain
options held by the Companys president and chief executive officer to purchase
40,000 shares of common stock. He was expected to become fully vested under the
original terms of the
options; the options had no intrinsic value on the date of acceleration and,
therefore, additional compensation expense was not incurred as a result of the
accelerated vesting. Immediately thereafter, the president and chief executive
officer of the Company exercised vested employee stock options for 408,333
shares of the Companys common stock, at the exercise price of $3.75 per share.
He executed non-interest bearing, unsecured, full-recourse promissory notes
totaling $1,531,249 with maturity dates coinciding with the expiration dates of
each option grant, ranging from February 11, 2002, to May 30, 2007. The
closing market price of the Companys common stock on July 5, 2000, was $3.31
per share. The Company recorded the notes receivable of $1,531,249, net of
unearned discount of $331,000, assuming a market interest rate of 8.50%.
During 2000, compensation expense was recorded in the amount of $152,000 (the
fair value of shares received less the present value of the notes receivable
using an 8.50% discount rate). The fair value of shares issued of $1,352,603
has been recorded as paid-in capital, and the notes receivable are recorded as
a deduction from shareholders equity. The Company has accreted $47,102,
$102,055 and $40,611 of

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discount on these notes as interest income in 2000,
2001, and 2002 respectively. The president and chief executive officer renewed
his non-interest bearing, unsecured, full-recourse promissory note in the
amount of $937,500 that came due February 11, 2002 with the Company for one
year at an interest rate of prime plus 250 basis points. He paid the note and
all accrued interest in full in December of 2002 and January of 2003 prior to
its maturity date of February 11, 2003.

During 2002 the Company purchased three vehicles from a corporation owned by
the president and chief executive officer and a director of the Company, for an
aggregate purchase price of approximately $74,000. During 2001 the Company
purchased five vehicles for an aggregate purchase price of $120,000, and during
2000 purchased ten vehicles for an aggregate purchase price of approximately
$299,000 from the same corporation. The Companys chief executive officer sold
that corporation in November of 2002.

Construction and development revenue for the year ended December 29, 2002
includes $5,687,874 on contracts with outside businesses controlled by the
Companys president and chief executive officer. Construction contracts
receivable at December 29, 2002, include $5,671,892 due on these contracts. Of
this amount, $5,511,027 was incurred on one development, of which $4,982,000
has been collected by the Company subsequent to the balance sheet date.

Results of Operations

The following table sets forth, for the periods indicated, the percentage
relationship of certain items of revenue and expense to the total revenues of
the Company.

|                   |                                                |                |  |                   |       |          |  |          |       |   |  |      |       |  
|------------------ | ---------------------------------------------- | -------------- |  | ----------------- | ----- | -------- |  | -------- | ----- | - |  | ---- | ----- | -
|                   |                                                |                |  | Fiscal Year Ended
|                   |                                                |                |  |                  
|                   |                                                |                |  | Dec. 31,          |       | Dec. 30, |  | Dec. 29,
|                   |                                                |                |  | 2000              |       | 2001     |  | 2002    
|                   |                                                |                |  |                   |       |          |  |         
|Revenues:          |                                                |                |  |                   |       |          |  |          |       |   |  |     
|                   | Hotel                                          |                |  | 69.7              | %     |          |  | 18.1     | %     |   |  | 31.3 | %    
|                   | Franchising, reservation and management        |                |  | 6.2               | %     |          |  | 9.2      | %     |   |  | 21.5 | %    
|                   | Construction and development  related parties |                |  | 0.2               | %     |          |  | 0.1      | %     |   |  | 21.1 | %    
|                   | Construction and development  other           |                |  | 20.4              | %     |          |  | 63.8     | %     |   |  | 14.9 | %    
|                   | Rent income                                    |                |  | 3.4               | %     |          |  | 8.1      | %     |   |  | 12.0 | %    
|                   | Other income                                   |                |  | 0.1               | %     |          |  | 0.8      | %     |   |  | 0.2  | %    
|                   |                                                |                |  |                   |       |          |  |          |       |   |  |     
|                   |                                                | Total revenues |  |                   | 100.0 | %        |  |          | 100.0 | % |  |      | 100.0 | %
|                   |                                                |                |  |                   |       |          |  |          |       |   |  |     
|Cost and expenses: |                                                |                |  |                   |       |          |  |          |       |   |  |     
|                   | Hotel                                          |                |  | 50.7              | %     |          |  | 13.6     | %     |   |  | 25.1 | %    
|                   | Franchising, reservation and management        |                |  | 4.2               | %     |          |  | 5.1      | %     |   |  | 15.1 | %    
|                   | Construction and development                   |                |  | 21.6              | %     |          |  | 59.7     | %     |   |  | 42.8 | %    
|                   | Rent expense                                   |                |  | 17.7              | %     |          |  | 1.4      | %     |   |  | 2.0  | %    
|                   | General and administrative                     |                |  | 8.6               | %     |          |  | 13.6     | %     |   |  | 28.1 | %    
|                   | Depreciation and amortization                  |                |  | 7.7               | %     |          |  | 7.9      | %     |   |  | 11.8 | %    
|                   | Write-off of pre-development costs             |                |  | 0.0               | %     |          |  | 0.0      | %     |   |  | 6.6  | %    

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|                                                                                    |                                                          |                         |       |                   |       |          |      |          |       |   |        |       |       |  
|----------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------- | ----- | ----------------- | ----- | -------- | ---- | -------- | ----- | - | ------ | ----- | ----- | -
|                                                                                    |                                                          |                         |       | Fiscal Year Ended
|                                                                                    |                                                          |                         |       |                  
|                                                                                    |                                                          |                         |       | Dec. 31,          |       | Dec. 30, |      | Dec. 29,
|                                                                                    |                                                          |                         |       | 2000              |       | 2001     |      | 2002    
|                                                                                    |                                                          |                         |       |                   |       |          |      |         
|                                                                                    | Write-off of construction contracts                      |                         |       | 0.0               | %     |          |      | 0.0      | %     |   |        | 12.8  | %    
|                                                                                    | Write-off of accounts receivable                         |                         |       | 0.0               | %     |          |      | 0.0      | %     |   |        | 4.6   | %    
|                                                                                    | Write-off of goodwill                                    |                         |       | 0.0               | %     |          |      | 0.0      | %     |   |        | 8.4   | %    
|                                                                                    | Write-off of trademarks and franchise rights             |                         |       | 0.0               | %     |          |      | 0.0      | %     |   |        | 15.6  | %    
|                                                                                    | Write-down of notes receivable                           |                         |       | 0.0               | %     |          |      | 0.0      | %     |   |        | 74.7  | %    
|                                                                                    | Impairment of real estate                                |                         |       | 0.0               | %     |          |      | 0.0      | %     |   |        | 2.3   | %    
|                                                                                    |                                                          |                         |       |                   |       |          |      |          |       |   |        |      
|                                                                                    |                                                          | Total cost and expenses |       |                   | 110.5 | %        |      |          | 101.2 | % |        |       | 249.9 | %
|                                                                                    |                                                          |                         |       |                   |       |          |      |          |       |   |        |      
|Operating loss                                                                      |                                                          |                         | (10.5 | )%                |       |          | (1.2 | )%       |       |   | (149.9 | )%   
|                                                                                   
|                                                                                    | Gain on sale of property and leasehold interests         |                         |       | 8.4               | %     |          |      | 8.7      | %     |   |        | 2.2   | %    
|                                                                                    | Gain on sale of available-for-sale securities            |                         |       | 0.0               | %     |          |      | 0.0      | %     |   |        | 1.1   | %    
|                                                                                    | Gain on early extinguishments of debt                    |                         |       | 12.5              | %     |          |      | 2.1      | %     |   |        | 9.1   | %    
|                                                                                    | Interest expense                                         |                         |       | (17.6             | )%    |          |      | (19.2    | )%    |   |        | (31.0 | )%   
|                                                                                    | Interest income                                          |                         |       | 11.0              | %     |          |      | 14.8     | %     |   |        | 17.7  | %    
|                                                                                    | Arbitration award                                        |                         |       | 0.0               | %     |          |      | 0.0      | %     |   |        | 31.4  | %    
|                                                                                    |                                                          |                         |       |                   |       |          |      |          |       |   |        |      
|Earnings (loss) before income taxes and minority interests                          |                                                          |                         | 3.9   | %                 |       |          | 5.2  | %        |       |   | (119.4 | )%   
|Income tax (expense) benefit                                                        |                                                          |                         | (2.1  | )%                |       |          | (1.8 | )%       |       |   | 31.6   | %    
|Minority interests in (earnings) loss of consolidated
subsidiaries and partnerships |                                                          |                         | (0.1  | %)                |       |          | (0.1 | %)       |       |   | 0.7    | %    
|                                                                                    |                                                          |                         |       |                   |       |          |      |          |       |   |        |      
|Earnings (loss) from continuing operations                                          |                                                          |                         | 1.7   | %                 |       |          | 3.2  | %        |       |   | (87.1  | )%   
|Discontinued operations:                                                            |                                                          |                         |       |                   |       |          |      |          |       |   |        |      
|                                                                                    | Operations of hotels disposed of and transferred         |                         |       | (0.7              | )%    |          |      | (1.1     | )%    |   |        | (2.3  | )%   
|                                                                                    | Loss on disposal and transfer of discontinued operations |                         |       | 0.0               | %     |          |      | 0.0      | %     |   |        | (10.3 | )%   
|                                                                                    |                                                          |                         |       |                   |       |          |      |          |       |   |        |      
|Net earnings (loss)                                                                 |                                                          |                         | 1.0   | %                 |       |          | 2.1  | %        |       |   | (99.7  | )%   
|                                                                                    |                                                          |                         |       |                   |       |          |      |          |       |   |        |      

For the Fiscal Years Ended December 29, 2002 and December 30, 2001

For the fiscal year ended December 29, 2002, total revenues decreased
34.2% to $28.3 million from $43.0 million for the fiscal year ended December
30, 2001.

The Company owned and operated two hotel brands (Shoneys Inns and
GuestHouse)
beginning in the second quarter of fiscal 2002, and Shoneys Inns during
2001 and the first quarter of 2002. The Company owned and operated one
AmeriSuites hotel beginning in late 2001 and two AmeriSuites hotels throughout
most of 2002. Revenues from hotel operations in fiscal 2002 increased by 14.0%
to $8.9 million from $7.8 million for fiscal year 2001. For the 6 hotels
opened for all of both years (same hotels), average daily room rates in 2002
decreased 1.6% to $51.46 from $52.30 in 2001, and average occupancy rates
decreased from 51.4% in 2001 to 44.4% in 2002, resulting in a decrease in same
hotel revenues per available room (RevPAR) of 15.0%, from $26.90 in 2001 to
$22.87 in 2002. RevPAR for all Company-owned Shoneys Inns / GuestHouse
decreased by 14.8% in 2002 from 2001, from $26.83 to $22.87. The decreases in
the Shoneys Inns / GuestHouse RevPAR were due primarily to the declining
economic conditions in the Houston, Texas, market area where three of the six
Company-owned Inns are located. The remaining (non-same) hotels contributed
$3.1 million to hotel revenues in 2002 compared with $867,000 in 2001. The
$3.1 million revenues from non-same hotels in 2002 were

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from two AmeriSuites
hotels which the Company operated for most of the year and continues to operate
currently. The $867,000 revenues from non-same hotels in 2001 were from one new
AmeriSuites hotel which opened in the third quarter of 2001 and two Shoneys
Inns sold in the first quarter of 2001.

Franchising, reservation and management revenues in fiscal 2002 increased
by 53.2% from 2001, to $6.1 million in 2002 from $4.0 million in 2001. In
fiscal 2002 and 2001, initial franchise and franchise termination fees totaled
$185,000 and $314,000, respectively. The remaining franchising, management and
reservation revenues increased by $2.2 million, or 61.3%, from 2001 to 2002,
including an increase in royalty fee revenues of $369,000, a decrease in
management fees of $946,000, and an increase in reservation fee revenues of
$2.8 million. At the end of fiscal 2002 there were 112 franchised Shoneys Inns
/ GuestHouse in operation compared with 58 at the end of fiscal 2001; this
increase was due primarily to the acquisition of GuestHouse International
Franchise Systems, Inc. on May 2, 2002. Reservation fee revenues increased
dramatically due to the addition of GuestHouse in mid-2002 and additional
significant contracts with other lodging chains and independent lodging
facilities.

Revenues from construction and development activities in 2002 were $9.9
million compared with $27.5 million in fiscal 2001. The 2002 revenues earned
were primarily from various construction contracts being performed for third
parties of which several non-hotel projects for related parties were still in
progress at year-end 2002, while 2001 revenues earned were from four hotel
construction contracts being performed for third parties, two of which were
still in progress at year-end 2001. Revenues from construction and development
activities earned from related parties in 2002 totaled $5.7 million of the
total of $9.9 million earned in 2002. Revenues from construction and
development can vary widely from period to period depending upon the volume of
outside contract work and the timing of those projects. The events of
September 11, 2001, have had a significantly negative impact on the Companys
construction and development opportunities.

Rent revenue was $3.4 million in 2002, compared with $3.5 million in 2001.
The decrease was due to the sale of some restaurants to the lessees. Other
income decreased by $270,000 in 2002 from 2001. Other income can vary widely
from period to period due to the nature of this income and its varied sources.
Miscellaneous income in 2001 represented an unusually high level of revenue of
this nature.

Hotel operating expenses for fiscal 2002 increased by $1.3 million, or
21.4%, to $7.1 million from $5.8 million in 2001. Hotel operating expenses on
the two non-same hotels operated for most of 2002 were $2.1 million in 2002.
Hotel operating expenses on the hotel added in late 2001, and the two hotels
sold in early 2001 were $577,000 in 2001. Hotel operating expenses on the 6
same-hotels decreased by $194,000, or 3.7%, in 2002 from 2001. The operating
expenses as a percentage of operating revenues for this activity increased from
75.3% in 2001 to 80.1% in 2002. Operating expenses as a percentage of
operating revenues on the 6 same-hotels increased from 76.3% to 88.2% from 2001
to 2002. Hotel operating expenses on same-hotels were not reduced as much as
the decline in hotel revenues, thus reducing gross operating profit margin on
these hotels.

Franchising, reservation and management operating expenses increased by
$2.1

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million, or 95.1%, from 2001 to 2002. This was due to increased
reservation expenses, principally payroll and payroll-related, to support the
increased reservation revenues earned and increased franchise activity due to
the acquisition of the GuestHouse franchising rights.

Construction and development costs in 2002 were $12.1 million compared
with $25.7 million in 2001. The costs incurred were directly related to the
revenues earned from the third party construction contracts in progress in
2002, including contracts with related parties, compared with the third party
construction contracts in progress in 2001. The Company was unable to reduce
its construction and development overhead expenses in 2002 in relation to its
significant decrease in construction and development revenues from 2001.

Rent expense increased by $2,000, or 0.3%, in 2002 from 2001. As of
December 29, 2002, and December 30, 2001, the Company was obligated on only one
hotel lease.

General and administrative expenses increased by $2.1 million, or 36.2%,
from 2001 to 2002. The increase was due primarily to increased insurance costs,
professional fees and litigation expenses. The increase in professional fees
was due primarily to legal fees incurred in the arbitration proceeding against
Prime (see discussion of arbitration award below), a litigation settlement of
$625,000, and state tax planning services for recovery of taxes paid.

Depreciation and amortization expenses decreased by $57,000, or 1.7%, from
2001 to 2002. The Company sold two hotels in April of 2001 and opened one new
Company-owned hotel in October of 2001. One new hotel was under construction at
the end of 2001 and opened in the first quarter of 2002. A reduction of
$421,000 was due to the adoption of Statement of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assetseffective with the 2002 fiscal
year.

The Company has incurred development costs related to several sites upon
which hotel development for third parties was planned. Due to the failure of
an upturn in the hotel development industry in 2002, as had been previously
anticipated, these previously capitalized development costs were charged off
since they did not improve the value of the land upon which they were incurred.
The impact of these development cost charge-offs was approximately $1.9
million in 2002. (Also, see Fourth Quarter Adjustments above.)

Additionally, in 2002 approximately $3.0 million of contracts receivable
on two third party construction contracts were written off as uncollectible.
One of the contracts receivable is for approximately $2.0 million, and the
Company received an arbitration award for substantially all of its claim, but
the owner of the hotel filed Chapter 11 bankruptcy on January 3, 2003. The
other contract receivable is for approximately $1.0 million, and arbitration
proceedings were initiated on January 15, 2003; the owner of the hotel claims
damages in excess of the amount owed. Any recovery from these two contracts
will be recorded as earned when received. Various other construction contracts
receivable totaling approximately $600,000 were also written off in 2002.
(Also, see Fourth Quarter Adjustments above.)

Unsecured accounts receivable from the 15 hotels securing the 15 first
mortgage

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notes discussed below and various other accounts receivable were
written off as uncollectible in the amount of approximately $1.3 million in
2002. (Also, see Fourth Quarter Adjustments above.)

The Company sold its interests in 27 Sumner Suites hotels in 2000 to Prime
Hospitality Corp., who subsequently converted all of them to their AmeriSuites
hotel brand. The Company continued to hold the Sumner Suites trademark with
the possibility of using it to brand future hotels it might develop or acquire.
In the second quarter
of 2002, management made the decision to abandon the trademark since the use of
the name by the Company in the future is highly unlikely. Consequently, the
remaining balance of $376,000 for the Sumner Suites trademark was written off
in the second quarter. The Company carried intangible assets (deferred charges
and goodwill) related to the acquisition and modifications of the franchising
rights for Shoneys Inns and Shoneys Inns & Suites at $6.4 million. The
Company has been unsuccessful in its efforts to sell new franchises for at
least a year, and existing franchisees have exited the Shoneys Inn system for
the past several years. In the second quarter of 2002, the Company acquired
the exclusive franchising rights for the GuestHouse International Inns & Suites
brand. The Company has decided to convert all existing Shoneys Inns to the
GuestHouse brand and to franchise only the GuestHouse brand in the future. No
more attempts will be made to franchise the Shoneys Inn brand. As a result,
the value of the Shoneys Inn franchising rights and related goodwill has been
determined to be worthless. Consequently, the balance of $6.4 million was
written off in the second quarter of 2002.

The Company holds 18 first mortgage notes receivable totaling $67.8
million resulting from the sale of hotels in 1998, 2000 and 2001, providing
seller financing for a portion of the selling price at the time of the sale.
The owners of 15 of the properties are affiliated with each other. The 15
mortgage notes are cross-collateralized and cross-defaulted and mature July 30,
2003. Even though all first mortgage payments on these 15 hotels were timely
received through the end of 2002, the common owner has notified the Company
that it is unlikely that it will be able to refinance the properties by the
notes maturity dates. The Company does not desire to extend the maturity
dates and, therefore, anticipates that it will be necessary to resume title to
the properties. The owner of the properties agreed in late December of 2002 to
transfer the hotels back to the Company by deeds in lieu of foreclosure. In
anticipation of this, the Company began midway through the fourth quarter to
find cash purchasers of the properties in the event the Company re-acquired
ownership. Offers received recently have been disappointing, but the Company
does not desire to take back ownership and operate the properties. Therefore,
it is likely to sell the properties at values significantly below the balances
of the notes receivable and as of December 29, 2002, wrote down the notes
receivable to the estimated net selling price of the properties. The Company
is negotiating with the common owner of the other three hotels secured by first
mortgage notes receivable held by the Company, and has agreed to discount the
notes in order to accelerate payment by its refinancing of at least two of the
hotels. The Company wrote these notes down to their estimated collectible
balances as of December 29, 2002. The total write-downs of all 18 notes
receivable at the end of the Companys 2002 fiscal year were $21.2 million.
(Also, see Fourth Quarter Adjustments above.)

The Company tested its real estate owned as of December 29, 2002, for
impairment

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in accordance with SFAS No. 144. One of the hotels owned and
operated by the Company was determined to be impaired in value as measured
against its carrying value. The amount of the impairment was determined to be
$567,000; therefore, the carrying value of this hotel was written down in 2002
to its estimated fair value. The Company also sold a parcel of undeveloped
land which it owned in early 2003 at net proceeds of less than the carrying
value at the end of 2002. The carrying value of this land parcel was written
down in 2002 to the net proceeds subsequently realized, thus reporting an
impairment loss of $77,000 on this parcel. Due to the current condition of the
economy and of the lodging industry, it is reasonably possible that a change in
the estimate of the fair value of other real estate, particularly hotels, owned
by the Company may occur in the near future, resulting in additional impairment
charges.

The gain recognized on the sale of property in 2002 was $628,000 compared
with $3.8 million in 2001. The net gain recognized in 2002 included gains of
$447,000 on the sale of two restaurants to the operator/lessees, and gains of
$395,000 on the sale of excess land, partially offset by a loss of $232,000 due
to costs incurred on the disposal of two hotels. The gain of $3.8 million in
2001 included $3.6 million from the Companys sale of one hotel and three
restaurants. Another hotel was sold in 2001, but the gain was deferred and is
being recognized under the installment method of
accounting until full accrual accounting is warranted. Approximately
$175,000 of the gain on the sale of two of the restaurants was also deferred
and is being recognized under the installment method of accounting, including
approximately $15,000 recognized in 2002.

In the third quarter of 2002, the Company sold all of its
available-for-sale securities, recognizing a gain of $315,000.

Pursuant to a plan adopted in 1999 to repurchase a portion of the
Companys outstanding subordinated indebtedness in the open market and in
negotiated transactions, the Company repurchased $1.6 million of its 7.50%
subordinated debentures in 2002 at a discount, recognizing a gain of $375,000.
In 2001, the Company repurchased $3.4 million of its 7.50% subordinated
debentures at a discount, recognizing a gain of $1.0 million. Additionally, in
2002, the Company, in a negotiated transaction, exchanged $8.2 million face
value of its senior subordinated notes previously purchased for $5.3 million,
for $7.5 million of its outstanding 7.50% subordinated debentures, recognizing
a gain of $2.2 million. The Company adopted Statement of Financial Accounting
Standards No. 145 at the beginning of fiscal 2002. Accordingly, gains and
losses from debt extinguishments are no longer classified in the statement of
earnings as extraordinary items. See the further discussion in Liquidity and
Capital Resources below.

Interest expense in 2002 increased from 2001 by $501,000, or 6.1%, while
interest income decreased by $1.4 million, or 21.3%. The increase in interest
expense was due primarily to higher levels of borrowing on the Companys bank
credit facilities in 2002 than in 2001. Interest income increased due to
seller financing of a portion of the sales price of two Shoneys Inns sold to
franchisees in April of 2001, and one Shoneys Inn sold in June of 2002, but
was more than offset by decreases in the interest rates charged on other notes
receivable due to the general decline in interest rates and the interest rate
terms of those notes.

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The Company had filed an arbitration claim against Prime in June of 2001
seeking monetary damages related to the non-use of the Companys reservation
center as agreed. In June of 2002, the Arbitrator ruled that Primes material
breach of contract caused the Company to lose $8.9 million in anticipated
profit under the terms of the agreement, and accordingly awarded the Company
its full damages of $8.9 million. Prime paid the award to the Company on
August 1, 2002.

The effective tax rate differs from the federal and state statutory rates
as a result of interest on deferred gains and the non-deductibility of the
write-off of certain intangible assets in 2002.

Discontinued operations resulted from the sale and/or transfer of seven
hotels in 2002. The effect of these hotels operations and the losses on the
sales of the hotels have been removed from operating earnings and from the gain
on sale of property and leasehold interests in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. (Also, see Fourth Quarter Adjustments above.)

For the Fiscal Years Ended December 30, 2001 and December 31, 2000

For the fiscal year ended December 30, 2001, total revenues decreased
26.2% to $43.0 million from $58.3 million for the fiscal year ended December
31, 2000.

The Company owned and operated two hotel brands (Sumner Suites and
Shoneys Inns) until mid-2000, and primarily one brand (Shoneys Inns) in the
last two quarters of 2000 and during fiscal 2001. The Company owned and
operated one AmeriSuites hotel beginning in late 2001. Revenues from hotel
operations in fiscal 2001 decreased by 80.9% to $7.8 million: from $40.7
million for fiscal year 2000. For the 6 hotels opened for all of both years
(same hotels), average daily room rates in 2001 increased
1.8% to $52.30 from $51.39 in 2000, and average occupancy rates increased
from 46.0% in 2000 to 51.4% in 2001, resulting in an increase in same hotel
revenues per available room (RevPAR) of 13.8%, from $23.63 in 2000 to $26.90 in
2001. RevPAR for all Company-owned Shoneys Inns increased by 10.5% in 2001
from 2000: from $24.29 to $26.83. The increases in the Shoneys Inns RevPAR
were due primarily to the improved economic conditions in the Houston, Texas,
market area where three of the Company-owned Shoneys Inns are located. The
remaining (non-same) hotels contributed $867,000 to hotel revenues in 2001
compared with $34.7 million in 2000. The $867,000 revenues from non-same
hotels in 2001 were from two hotels in which the Company sold its interests in
the first quarter of 2001 and one new hotel which opened in the third quarter
of 2001. The $34.7 million revenues from non-same hotels in 2000 were from 28
hotels in which the Company sold its interests in the second quarter of 2000
and the two hotels sold in the first quarter of 2001.

Franchising, reservation and management revenues in fiscal 2001 increased
by 10.1% from 2000, to $4.0 million in 2001 from $3.6 million in 2000. In
fiscal 2001 and 2000, initial franchise and franchise termination fees totaled
$314,000 and $615,000, respectively. Exclusive of these non-recurring franchise
revenues, the remaining franchising, reservation and management revenues
increased by $666,000, or 22.3%, from 2000 to 2001, including an increase in
management fee revenues of $891,000 which was

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due entirely to 17 new management
contracts which became effective in April 2001. At the end of fiscal 2001 there
were 58 franchised Shoneys Inns in operation compared with 59 at the end of
fiscal 2000; this decrease was due to five terminations, two new franchised
Inns added, and two Company-owned Inns sold to franchisees during 2001. As of
December 30, 2001, there were no franchised Shoneys Inns under construction.

Revenues from construction and development activities in 2001 were $27.5
million compared with $12.0 million in fiscal 2000. The 2001 revenues earned
were primarily from four hotel construction contracts being performed for third
parties, two of which were still in progress at year-end, while 2000 revenues
earned were from three hotel construction contracts being performed for third
parties, two of which were still in progress at year-end. Revenues from
construction and development can vary widely from period to period depending
upon the volume of outside contract work and the timing of those projects.

Rent revenue was $3.5 million in 2001, compared with $2.0 million in 2000.
The entire $1.5 million increase was due to the lease of three hotels
effective July 10, 2000, to Prime Hospitality Corp. These three hotels had
been previously operated by the Company. Other income increased by $288,000 in
2001 from 2000. Other income can vary widely from period to period due to the
nature of this income and its varied sources.

Hotel operating expenses for fiscal 2001 decreased by $23.7 million, or
80.2%, to $5.9 million from $30.0 million in 2000. The sale of the Companys
interest in one Shoneys Inn and all 27 of its Sumner Suites hotels in the
second quarter of 2000 and the sale of two Shoneys Inns in the first quarter
of 2001 accounted for a decrease of $24.3 million in hotel operating expenses
from 2000 to 2001. Hotel operating expenses on the hotel added in late 2001
were $121,000. Hotel operating expenses on the 6 same-hotels increased by
$458,000, or 9.5%, in 2001 over 2000. The operating expenses as a percentage
of operating revenues for this activity increased from 72.7% in 2000 to 75.3%
in 2001. Operating expenses as a percentage of operating revenues on the 6
same-hotels decreased from 80.0% to 76.3% from 2000 to 2001. Increases in
hotel operating expenses on same hotels were primarily in the areas of
payroll-related costs, utilities, and insurance.

Franchising, reservation and management services operating expenses
decreased by $268,000, or 10.9%, from 2000 to 2001. This was due primarily to
reduced central reservation center expenses caused by the cancellation of
reservation services in November of 2000 on the 27 hotels of which the
Companys operating interests had been sold in mid-2000.

Construction and development costs in 2001 were $25.7 million compared
with $12.6 million in 2000. The costs incurred were directly related to the
revenues earned from the third party construction contracts in progress in 2001
compared with the third party construction contracts in progress in 2000, two
of which were still in progress at year-end 2000 and two of which were still in
progress at year-end 2001.

Rent expense decreased by $9.8 million, or 94.4%, in 2001 from 2000. The
decrease was due to (1) the Companys sale of its leasehold interest in 24 of
its Sumner Suites hotels on July 9, 2000, which had previously been sold and
leased back,

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(2) the lease of another Sumner Suites hotel on July 9, 2000, to a
tenant who assumed a land lease on that hotel, and (3) the sale of a Shoneys
Inn in June, 2000, on which the purchaser assumed the existing land lease. As
of December 30, 2001, the Company was obligated on only one hotel lease; in
2001, rent expense on this lease was $582,000.

General and administrative expenses increased by $849,000, or 17.0%, from
2000 to 2001. The increase was due primarily to increased insurance costs,
professional fees, and travel expenses.

Depreciation and amortization expenses decreased by $1.1 million, or
24.6%, from 2000 to 2001. This decrease was due primarily to the sale and
leaseback of four hotels in May of 2000, combined with the sale of another
hotel in June of 2000 and two hotels in April of 2001. The Company opened one
new Company-owned hotel in October of 2001. One new hotel was under
construction at the end of the year.

The gain recognized on the sale of property in 2001 was $3.8 million
compared with $4.9 million in 2000. The gain of $3.8 million in 2001 included
$3.6 million from the Companys sale of one hotel and three restaurants.
Another hotel was sold in 2001, but the gain was deferred and is being
recognized under the installment method of accounting until full accrual
accounting is warranted. Approximately $175,000 of the gain on the sale of two
of the restaurants was also deferred and is being recognized under the
installment method of accounting. The $4.9 million recognized in 2000 included
$3.6 million from the sale of the Companys leasehold interest in 24 Sumner
Suites hotels which had been previously sold and leased back, at which time the
gain had been deferred and was being amortized over the lease term.
Additionally, a Shoneys Inn was sold in second quarter at a gain of $755,000
and $299,000 was recognized in first quarter from the recognition of previously
deferred gains related to the sale of two Shoneys Inns in 1998. The remaining
$207,000 gain in 2000 was from the sale of land held for resale and
miscellaneous real estate.

The gains from early extinguishments of debt in 2001 and 2000 were the
result of the repurchase of $3.4 million and $29.8 million, respectively, of
the Companys previously issued subordinated debt at a discount from face
value, net of the write-off of related unamortized deferred financing costs.

Interest expense decreased by $2.0 million, while interest income
decreased by $21,000 from 2000 to 2001, for a total decrease of $2.0 million in
net interest expense. The decrease in interest expense resulted primarily from
interest expense reductions from the extinguishments of debt from the
repurchase of $45.8 million of the Companys outstanding subordinated debt in
the open market and in privately negotiated transactions beginning October 1,
1999 and continuing through 2001, of which $33.2 million of these
extinguishments occurred in 2000 and 2001. Additional debt reductions,
including a pay down of $7.5 million of the Companys outstanding debt using a
portion of the $38.4 million gross proceeds from the sale-leaseback of four
hotels in May of 2000, further reduced interest expense. Partially offsetting
these reductions in interest expense was interest incurred to the Internal
Revenue Service due to a tax payment deficiency for 1997, assessed based upon
an audit by the Service (see Footnote 9 to the consolidated financial
statements). The decrease in interest income in 2001 from 2000 was due
primarily to the net effect of a reduction in the interest rate on 15

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mortgage
notes receivable in mid-2001, and an increase in interest earned on mortgage
notes receivable from the seller-financed portion of the proceeds of the sale
of one
hotel in June 2000 and two hotels in April 2001.

The Companys effective tax rate of 36.1% for the year ended December 30,
2001 differed from the federal statutory rate primarily as a result of interest
on deferred gains and a reduction due to previously accrued income taxes. This
$451,000 reduction in 2001 income taxes resulted from a settlement with taxing
authorities on amounts previously provided for disputes on the 1997 tax year.
The Companys effective tax rate of 55.5% for the year ended December 31, 2000
differed from the federal statutory rate primarily as a result of interest on
deferred gains.

Critical Accounting Policies and Practices

The Company has prepared its financial statements in conformity with
accounting principles generally accepted in the United States, and these
statements necessarily include some amounts that are based upon informed
judgments and estimates of management. The Companys significant accounting
policies are discussed in Note 1 of the Notes to Consolidated Financial
Statements. The Companys critical accounting policies are subject to
judgments and uncertainties which affect the application of such policies. The
Companys financial position or results of operations may be materially
different when reported under different conditions or when using different
assumptions in the application of such policies. In the event estimates or
assumptions prove to be different from reported amounts, adjustments are made
in subsequent periods to reflect more current information. The Companys
critical accounting policies and practices include impairment of long-lived
assets, collectibility of accounts and notes receivable, percentage of
completion accounting for construction contracts, profit recognition on sale
transactions, nonmonetary transactions, and income taxes. The following is a
brief discussion of these more significant accounting policies and practices
used by the Company.

Impairment of Long-Lived Assets: The Company records impairment losses on
long-lived assets used in operations and finite-lived intangibles when
indicators of impairment are present and the undiscounted cash flows related to
those assets are less than their carrying amounts. The Company records
impairment losses on long-lived assets under development or held for sale when
indications of impairment are present and the estimated fair value less costs
to sell is less than the carrying amount. The Companys impairment review
process relies on managements judgment regarding the indicators of impairment,
the remaining lives of assets used to generate assets undiscounted cash flows,
and the fair value of assets at a particular point in time. Under different
assumptions or conditions, the asset impairment analysis may yield a different
result, which would alter the gain or loss on the eventual disposition of the
asset.

Collectibility of Accounts and Notes Receivable: The Company continuously
monitors collections from its customers and debtors under notes receivable and
maintains allowances for doubtful accounts based upon historical experience and
any specific customer collection issues that are identified. While such credit
losses have historically been within the Companys expectations, there can be
no assurance that the historical experience will continue at the same level in
the future. Notes receivable

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are generally secured by first mortgages on the
underlying assets. The majority of these are from a group of companies that
are affiliated with one another, creating a concentration of credit risk. The
Company determined in the fourth quarter of 2002 that the fair values of the
underlying assets were less than the balances of the first mortgage notes and
that the notes receivable were under-collateralized. The Company, accordingly,
recorded a write-down of $21.2 million as previously discussed.

Percentage of Completion Accounting for Construction Contracts:
Construction and development revenues earned on fixed price contracts are
recognized based upon the percentage of completion method, measured by the
percentage of cost incurred to total estimated cost for each contract. The
total estimated cost of each contract involves the use of various estimating
techniques to project costs of completion. These percentage of completion and
cost estimates involve various assumptions and projections
relative to the outcome of future events, such as price and timing of
construction materials, labor costs, and overhead costs. The Company
reevaluates its contract cost estimates periodically and reflects changes in
estimates in the current and future periods.

Profit Recognition on Sale Transactions: As prescribed by Financial
Accounting Standards Board (FASB) Statement No. 66, Accounting for Sales of
Real Estate, profit from the sale of land and hotel properties is recognized at
the time the sale is consummated, the minimum down payment is received, and
there is no significant continuing involvement. When the sale involves a
leaseback, and otherwise qualifies for sale-leaseback accounting, as defined by
FASB Statement No. 98, Accounting for Leases, the profit is then accounted for
in accordance with FASB Statements No. 13, Accounting for Leasesand No. 28,
Accounting for Sales with Leasebacks, which generally require deferral and
amortization of profits ratably over the related lease terms.

Nonmonetary Transactions: The Company accounts for nonmonetary
transactions involving its hotels in accordance with Accounting Principles
Board (APB)Opinion No. 29, Accounting for Nonmonetary Transactions, FASB
Statement No. 141, Business Combinations, and Emerging Issues Task Force
(EITF)Issues No. 98-3, Determining Whether a Nonmonetary Transaction Involves
Receipt of Productive Assets or a Businessand No. 01-2, Interpretations of
APB Opinion No. 29. If the hotel received in a nonmonetary exchange of hotels
meets the definition of a business, it is accounted for as a purchase at fair
value. If the hotel received does not meet the definition of a business, the
guidance of APB No. 29, as interpreted by EITF 01-2, is followed. Under the
general guidelines of APB No. 29, an exchange of nonmonetary assets is
accounted for at fair value, unless the assets are similar and the other
conditions of APB No. 29 and EITF 01-2 are met, whereby the transaction is
accounted for at historical cost, resulting in no gain recognition.

Income Taxes: The Company uses the liability method to account for income
taxes. The preparation of consolidated financial statements involves estimating
the Companys current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities,
which are included within the consolidated balance sheet. An assessment of the
recoverability of the deferred tax assets is made, and a valuation allowance
may be established based upon this assessment.

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Liquidity and Capital Resources

The Companys cash flows used in operating activities were $8.7 million in
2002, compared with cash flows provided by operating activities of $8.0 million
in 2001 and cash flows used in operating activities of $1.1 million in 2000.
Losses from continuing operations were $24.7 million in 2002, while earnings
from continuing operations were $1.4 million in 2001 and $978,000 in 2000.
Depreciation and amortization was $3.3 million, $3.4 million, and $4.5 million
in 2002, 2001, and 2000, respectively, the declines in 2001 and 2002 being the
result of the sale of properties in excess of new properties being opened
during these years. The Company recognized $628,000, $3.8 million, and $4.9
million from gains on sale of property during 2002, 2001 and 2000,
respectively. The gain of $3.8 million in 2001 included $3.6 million from the
Companys sale of one hotel and three restaurants. Another hotel was sold in
2001, but the gain was deferred and is being recognized under the installment
method of accounting until full accrual accounting is warranted. Approximately
$175,000 of the gain on the sale of two of the restaurants was also deferred
and is being recognized under the installment method of accounting. The $4.9
million gain on sale of property in 2000 represented $4.4 million from the sale
of the Companys interest in 25 lodging facilities and $207,000 from the sale
of other real estate. The gains on early extinguishment of debt were all due
to the repurchase by the Company of its outstanding public debt at a discount
from face value. Decreases in accounts payable and accrued expenses used $3.5
million cash in 2002 and $5.4 million in 2000, respectively, as compared with
cash provided of $6.7 million in 2001. A decrease in trade receivables of
$162,000 and $2.2 million in 2002 and 2000, respectively, provided cash
compared with an increase in trade receivables using cash of $926,000 in 2001.
The changes in trade receivables and accounts payable in 2000 were due
primarily to the Companys sale of its operating interests in 27 of its hotels
in mid-2000.

The Companys cash flows provided by investing activities were $3.9
million in 2002 and $28.6 million in 2000 in contrast to $4.7 million used in
investing activities in 2001. Proceeds from the sale of property and leasehold
interests were $6.4 million, $2.9 million, and $53.5 million in 2002, 2001, and
2000, respectively. These amounts in 2000 include the net proceeds from the
sale/leaseback of four hotels in 2000. In addition to the sale/leaseback
transaction in 2000, several other parcels of land held for resale were sold
for cash, and in 2000 one hotel was sold for a cash down payment of $550,000.
In 2001, three restaurants and two hotels were sold for a combination of cash
and seller-financed notes, resulting in cash proceeds of $2.9 million. The
Company has required capital principally for the construction and acquisition
of new lodging facilities and the purchase of equipment and leasehold
improvements. Capital expenditures for such purposes were $3.9 million, $20.9
million, and $8.8 million in 2002, 2001, and 2000, respectively. As of the end
of 2002, no hotels were under construction. The Company sold all of its
available-for-sale securities in 2002 for $428,000, and invested $1.8 million
in the acquisition of GuestHouse International Franchise Systems, Inc. and two
hotel exchange transactions.

Net cash provided by financing activities was $3.7 million in 2002,
compared with $6.0 million and $25.5 million used in financing activities in
2001 and 2000, respectively. In 1999, the Company adopted a plan to repurchase
up to $12.5 million of the Companys outstanding common stock. In July of 1999
the Company increased the

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authorized amount to repurchase an additional $7.5
million of common stock pursuant to the plan, increasing the total amount
authorized to $20.0 million. In 2000, 238,000 shares were repurchased for $1.2
million. In November of 2001 the Company increased the authorized amount to
repurchase an additional $3.0 million of common stock pursuant to the plan,
increasing the total amount authorized to $23.0 million. In 2002, 25,000 shares
were repurchased for $148,000, and in 2001, 457,000 shares were repurchased for
$1.9 million. In the second quarter of 1999 the Company announced its plan to
use up to $12.0 million of its Company funds to repurchase a portion of its
$54.0 million outstanding convertible subordinated debentures. In the third
quarter of 2000 the Company increased the total amount authorized to $20.0
million, and repurchased $21.0 million of this debt for $15.4 million in 2000.
The Company increased the total amount authorized to $25.0 million in November
of 2001. An additional $1.6 million of this debt was repurchased for $1.2
million in 2002 and $3.4 million of this debt was repurchased for $2.3 million
in 2001. In the third quarter of 1999 the Company announced its plan to use up
to $15 million of its Company funds to repurchase a portion of its outstanding
$67.7 million senior subordinated notes. In 2000, the Company repurchased $8.8
million of these debt securities at a cost of $6.2 million.

The Company established a three-year credit facility with a financial
institution effective August 27, 1999. An amendment to the credit facility
became effective October 3, 2001, which, among other changes, extended the
maturity to September 30, 2004. A second amendment to the credit facility
became effective November 26, 2002, which, among other changes, added real
property collateral for the purpose of increasing the borrowing base. The
credit facility is for $30 million (a $10 million term loan and a $20 million
revolving line of credit), secured by a pledge of certain promissory notes
payable to the Company received in connection with the sale of 16 of the
Companys lodging facilities in the third quarter of 1998 and real property
collateral (one hotel) added in 2002 by the second amendment. The borrowing
base is the lower of (a) 85% of the outstanding principal amount of the pledged
notes, (b) 65% of the appraised market value of the underlying real property
collateral securing the pledged notes and of the real property collateral, (c)
a multiple of the trailing twelve months net operating income of the real
property collateral and of the underlying properties securing the pledged notes
serving as collateral, or (d) $30 million. Effective October 3, 2001, the
interest rate on the term loan is at the lenders base rate plus 100 basis
points, and the interest rate on the revolving line
of credit is at the lenders base rate plus 250 points, with a floor of 7.00%
on both portions of the facility. The Company is to pay commitment fees on the
unused portion of the facility at .50% per annum. The credit facility also
contains covenants which limit or prohibit the incurring of certain additional
indebtedness in excess of a specified debt to total capital ratio, prohibit
additional liens on the collateral, restrict mergers and the payment of
dividends and restrict the Companys ability to place liens on unencumbered
assets. The credit facility contains financial covenants as to the Companys
minimum net worth. As of December 29, 2002, the Company had $21.7 million in
borrowings outstanding under this credit facility, consisting of the $10
million term loan and $11.7 million on the revolving line of credit.

The Company also maintains a $1.0 million unsecured line of credit with
another bank, bearing interest at the lenders prime rate, maturing May 31,
2003. As of December 29, 2002, the Company had $500,000 outstanding under this
credit facility.

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The Company also has a loan secured by its corporate aircraft with a
balance of $5.8 million as of December 29, 2002. This loan currently bears
interest at 8.19% per annum and is amortized to its maturity of December 29,
2010. The interest rate was fixed for the first five years ending January 1,
2006, and is adjustable to a new rate for the second five years of the 10-year
term equal to 325 basis points over 5-year Treasury rates.

The Companys outstanding 7.50% Convertible Subordinated Debentures in the
face amount of $16.5 million mature in May of 2004. Its outstanding Series A
Senior Subordinated Notes in the face amount of $26.0 million mature in
November of 2006 and its Series B Notes in the face amount of $19.3 million
mature in September of 2007.

Under the terms of the trust indenture governing the senior subordinated
notes issued in 1996 and 1997, the Company is obligated to redeem at par up to
5% annually of the notes issued under the indenture beginning in 1999.
Approximately $3.2 million, $3.1 million, and $2.9 million of these notes were
redeemed under this provision on December 1, 2002, December 1, 2001 and
December 1, 2000, respectively.

The trust indenture applicable to the Series A and Series B senior
subordinated notes contains a financial covenant requiring a minimum
consolidated net worth of $75.0 million. As of December 29, 2002, the
Companys consolidated net worth was less than the required amount. This
covenant violation, as specified in the indenture, allows the holders of a
minimum of 25% of the outstanding principal amount of the notes to declare a
default. In the event that a default is declared, the Company, upon receipt of
written notice by certified mail from the trustee, has 60 days from receipt of
notice to cure the default. A minimum of 51% of the outstanding principal
amount of the notes outstanding may waive any covenant non-compliance default
declared by the 25% or more holders. The Company is in the process of
completing an Exchange Offer and Consent Solicitation (Exchange Offer), which
is expected to be completed within the 60-day cure period. The terms of the
Exchange Offer contain a modification of the financial covenants reducing the
minimum consolidated net worth, which is expected to cure the default, if
declared, without any further action. However, there can be no assurance that
the Exchange Offer will be completed. Because of the covenant violation at
December 29, 2002, the Company has classified all of the Series A and Series B
senior subordinated notes as a current liability. Additionally, due to
cross-default provisions in the Companys convertible subordinated debentures
and a loan secured by the Companys aircraft, these debt instruments have also
been classified as current liabilities as of December 29, 2002.

The total amount of debt classified as current liabilities due to the
circumstances discussed above was $67.5 million as of December 29, 2002. As of
April 4, 2003, the Company had reduced that amount by $2.2 million, including
$838,000 of the senior subordinated notes. The Company currently maintains
approximately $11.0 million in cash and is currently expecting to collect cash
proceeds of approximately $40.0 million within the next 60 days from the
collection of two notes receivable, the sale

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of the properties serving as
collateral under ten notes receivable, and the sale of three unencumbered
properties. See Fourth Quarter Adjustments above. Negotiations are
currently in progress relative to the sale of an additional twelve hotels, five
of which collateralize notes receivable, with net proceeds of approximately $53
million expected. Additionally, the Company anticipates refunds of
approximately $8.5 million of previously paid income taxes by mid-2003, and at
least three parcels of undeveloped land are expected to be sold in 2003 for
approximately $5.6 million. The Company expects to cure any default declared by
the senior subordinated note holders within the 60 day cure period, but if not,
is confident that it will have sufficient cash available from the above-listed
sources and cash from other sources to pay its debt in full in 2003.

The Company is evaluating various alternatives to maximize shareholder
value. These alternatives could include, without limitation, the franchising
and operation of additional GuestHouse Inns & Suites, a sale of the remaining
Company-owned hotels, negotiating new credit arrangements, developing hotels
for other owners, the repurchase of additional shares of the Companys common
stock or outstanding debt securities, or any combination of these or other
strategies, including, as announced on January 16, 2003, the possible spin-off
of its reservation services subsidiary (InnLink) to the Companys shareholders.
The Exchange Offer, if consummated, will allow the Company more flexibility in
purchasing its outstanding debt and common stock. The Company believes that a
combination of existing cash, the liquidation of notes receivable, the sale of
hotel properties and leasehold rights, net cash provided by operations, and
borrowings under existing credit facilities or mortgage debt, will be
sufficient to fund its capital expenditures, debt repayments and operations for
at least the next twelve months.

The following table represents the Companys outstanding contractual
obligations as of December 29, 2002 excluding standby letters of credit of $3.6
million outstanding at December 29, 2002. The letters of credit are maintained
primarily to support the Companys workers compensation insurance program and
industrial revenue bonds outstanding (see table below for outstanding
industrial revenue bonds outstanding at December 29, 2002). The payments due
as presented in the following table assume the possible acceleration of the
convertible subordinated debentures, senior subordinated notes, and the $5.8
million note payable due to the non-compliance of a financial
covenant contained in the trust indenture applicable to the senior
subordinated notes as of December 29, 2002, as discussed above.

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|                                          |  |                                                  |        |        |  |           |        |        |  |        |        |         |  |           |     |  |  |   |     |  |  |   |       | 
|----------------------------------------- |  | ------------------------------------------------ | ------ | ------ |  | --------- | ------ | ------ |  | ------ | ------ | ------- |  | --------- | --- |  |  | - | --- |  |  | - | ----- | 
|                                          |  | Payments due by period (in thousands of dollars)
|                                          |  |                                                 
|                                          |  |                                                  |        |        |  | Less than |        | 1 to 2 |  | 2 to 4 |        | 4 to 5  |  | More than
|                                          |  | Total                                            |        | 1 year |  | years     |        | years  |  | years  |        | 5 years
|                                          |  |                                                  |        |        |  |           |        |        |  |        |        |        
|Industrial revenue bonds                  |  | $                                                | 2,820  |        |  | $         | 95     |        |  | $      | 105    |         |  | $         | 240 |  |  | $ | 138 |  |  | $ | 2,242 | 
|7.50% convertible
subordinated debentures |  |                                                  | 16,520 |        |  |           | 16,520 |        |  |        |       |         |  |           |    |  |  |   |    |  |  |   |      | 
|9.75% Series A senior
subordinated notes  |  |                                                  | 23,657 |        |  |           | 23,657 |        |  |        |       |         |  |           |    |  |  |   |    |  |  |   |      | 
|9.55% Series B senior
subordinated notes  |  |                                                  | 19,065 |        |  |           | 19,065 |        |  |        |       |         |  |           |    |  |  |   |    |  |  |   |      | 
|Bank credit facilities                    |  |                                                  | 22,156 |        |  |           | 500    |        |  |        | 21,656 |         |  |           |    |  |  |   |    |  |  |   |      | 
|Notes payable  bank                      |  |                                                  | 1,910  |        |  |           | 1,910  |        |  |        |       |         |  |           |    |  |  |   |    |  |  |   |      | 
|Notes payable  other                     |  |                                                  | 5,801  |        |  |           | 5,801  |        |  |        |       |         |  |           |    |  |  |   |    |  |  |   |      | 
|Operating lease obligations               |  |                                                  | 992    |        |  |           | 350    |        |  |        | 350    |         |  |           | 292 |  |  |   |    |  |  |   |      | 
|                                          |  |                                                  |        |        |  |           |        |        |  |        |        |         |  |           |     |  |  |   |     |  |  |   |       | 
|Total                                     |  | $                                                | 92,921 |        |  | $         | 67,898 |        |  | $      | 22,111 |         |  | $         | 532 |  |  | $ | 138 |  |  | $ | 2,242 | 
|                                          |  |                                                  |        |        |  |           |        |        |  |        |        |         |  |           |     |  |  |   |     |  |  |   |       | 

Scheduled payments of these obligations as of December 29, 2002, assuming
no acceleration of debt, are presented in the following table.

|                                          |  |                                                  |        |        |  |           |       |        |  |        |        |         |  |           |        |  |  |   |        |  |  |   |       | 
|----------------------------------------- |  | ------------------------------------------------ | ------ | ------ |  | --------- | ----- | ------ |  | ------ | ------ | ------- |  | --------- | ------ |  |  | - | ------ |  |  | - | ----- | 
|                                          |  | Payments due by period (in thousands of dollars)
|                                          |  |                                                 
|                                          |  |                                                  |        |        |  | Less than |       | 1 to 2 |  | 2 to 4 |        | 4 to 5  |  | More than
|                                          |  | Total                                            |        | 1 year |  | years     |       | years  |  | years  |        | 5 years
|                                          |  |                                                  |        |        |  |           |       |        |  |        |        |        
|Industrial revenue bonds                  |  | $                                                | 2,820  |        |  | $         | 95    |        |  | $      | 105    |         |  | $         | 240    |  |  | $ | 138    |  |  | $ | 2,242 | 
|7.50% convertible
subordinated debentures |  |                                                  | 16,520 |        |  |           |      |        |  |        | 16,520 |         |  |           |       |  |  |   |       |  |  |   |      | 
|9.75% Series A senior
subordinated notes  |  |                                                  | 23,657 |        |  |           |      |        |  |        |       |         |  |           | 23,657 |  |  |   |       |  |  |   |      | 
|9.55% Series B senior
subordinated notes  |  |                                                  | 19,065 |        |  |           |      |        |  |        |       |         |  |           |       |  |  |   | 19,065 |  |  |   |      | 
|Bank credit facilities                    |  |                                                  | 22,156 |        |  |           | 500   |        |  |        | 21,656 |         |  |           |       |  |  |   |       |  |  |   |      | 
|Notes payable  bank                      |  |                                                  | 1,910  |        |  |           | 1,910 |        |  |        |       |         |  |           |       |  |  |   |       |  |  |   |      | 
|Notes payable  other                     |  |                                                  | 5,801  |        |  |           | 528   |        |  |        | 573    |         |  |           | 1,296  |  |  |   | 732    |  |  |   | 2,672 | 
|Operating lease obligations               |  |                                                  | 992    |        |  |           | 350   |        |  |        | 350    |         |  |           | 292    |  |  |   |       |  |  |   |      | 
|                                          |  |                                                  |        |        |  |           |       |        |  |        |        |         |  |           |        |  |  |   |        |  |  |   |       | 
|Total                                     |  | $                                                | 92,921 |        |  | $         | 3,383 |        |  | $      | 39,204 |         |  | $         | 25,485 |  |  | $ | 19,935 |  |  | $ | 4,914 | 
|                                          |  |                                                  |        |        |  |           |       |        |  |        |        |         |  |           |        |  |  |   |        |  |  |   |       | 

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, (SFAS No. 141) and SFAS No. 142, Goodwill and
Other Intangible Assets(SFAS No. 142). SFAS No. 141 was effective July 1,
2001, and SFAS No. 142 was effective January 1, 2002. Under the new rules in
SFAS No. 142,

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goodwill and indefinite lived intangible assets are no longer
amortized effective January 1, 2002, but are subject to annual impairment
tests. Other intangible assets continue to be amortized over their useful
lives.

The Company has applied the new rules on accounting for goodwill and
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS No. 142 resulted in an increase in net
income of approximately $261,000 ($0.05 per share) per year. A reconciliation
of previously reported net income to the pro forma amounts adjusted for the
exclusion of goodwill and indefinite lived intangible assets amortization, net
of income tax effect, follows (in thousands of dollars):

|                             |                                                                    |   |                   |         |          |   |          |       |  |   |     |     | 
|---------------------------- | ------------------------------------------------------------------ | - | ----------------- | ------- | -------- | - | -------- | ----- |  | - | --- | --- | 
|                             |                                                                    |   | Fiscal Year Ended
|                             |                                                                    |   |                  
|                             |                                                                    |   | Dec. 29,          |         | Dec. 30, |   | Dec. 31,
|                             |                                                                    |   | 2002              |         | 2001     |   | 2000    
|                             |                                                                    |   |                   |         |          |   |         
|Reported net (loss) earnings |                                                                    | $ | (28,248           | )       |          | $ | 912      |       |  | $ | 578 |    
|                             | Add: Goodwill and indefinite
lived assets amortization, net of
tax |   |                   |        |          |   |          | 261   |  |   |     | 261 | 
|                             |                                                                    |   |                   |         |          |   |          |       |  |   |     |    
|                             | Pro forma adjusted net earnings                                    |   | $                 | (28,248 | )        |   | $        | 1,173 |  |   | $   | 839 | 
|                             |                                                                    |   |                   |         |          |   |          |       |  |   |     |    

During 2002, the Company performed the first of the required impairment tests
of goodwill and indefinite lived intangible assets and has recorded the effect
of these tests in 2002. The Company wrote off $6.4 million of goodwill and
intangible assets relating to the Shoneys Inns concept due to the acquisition
of GuestHouse International in the second quarter of 2002 and the decision to
convert all Shoneys Inns to the GuestHouse brand as soon a practical.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets(SFAS No. 144), which supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, (SFAS No. 121), and the accounting and
reporting provisions of APB No. 30, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 144 removes goodwill from its scope and
clarifies other implementation issues related to SFAS No. 121. SFAS No. 144
also provides a single framework for evaluating long-lived assets to be
disposed of by sale. The provisions of this statement were adopted at the
beginning of fiscal 2002.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.SFAS No. 145 rescinds Statement 4, which required all gains and
losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Since
the issuance of Statement 4, the use of debt extinguishment has become part of
the risk management strategy of many companies, including the Company. These
debt extinguishments will not be classified as extraordinary after the adoption
of SFAS No. 145. Adoption of SFAS No. 145 is required for fiscal years
beginning after May 15, 2002, but earlier application is encouraged. The
Company elected to adopt the provisions of SFAS No. 145 at the beginning of
fiscal 2002. The

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gains on extinguishment of debt for all periods presented,
previously classified as an
extraordinary item in prior periods, have been reclassified to conform
with the provisions of Statement 145.

SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure,issued in December 2002, which amends SFAS No. 123, Accounting for
Stock-Based Compensation,provides an alternative method of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The transition provisions of
SFAS No. 148 are effective for financial reports containing financial
statements for years ending after December 15, 2002, while certain additional
disclosure requirements of SFAS No. 148 are effective for interim periods
beginning after December 15, 2002. The Company has elected to account for its
stock-based compensation plans under the intrinsic value-based method of
accounting prescribed by Accounting Principals Board Opinion No. 25, Accounting
for Stock Issued to Employees,and does not utilize the fair value method.
However, the Company has adopted the disclosure requirements of SFAS No. 123
and has adopted the additional disclosure requirements as specified in SFAS No.
148 in fiscal 2002.

SFAS No. 143, Accounting for Asset Retirement Obligations,issued in June
2001, addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and for the associated
retirement costs. SFAS No. 143, which applies to all entities that have a
legal obligation associated with the retirement of tangible long-lived assets,
is effective for fiscal years beginning after June 15, 2002. The adoption of
SFAS No. 143 is not expected to have a material impact on the Companys
financial position or results of operations.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities,issued in June 2002, requires that a liability for the cost
associated with an exit or disposal activity be recognized when the liability
is incurred. SFAS No. 146 also establishes that fair value is the objective
for initial measurement of the liability. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company expects that the adoption of SFAS No. 146 during 2003 will
not materially impact the Companys financial position and results of
operations.

Forward-looking Statement Disclaimer

The statements appearing in this report which are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements, including delays in concluding or the inability to conclude
transactions, the establishment of competing facilities and services,
cancellation of leases or contracts, collectibility of notes receivable,
changes in applicable laws and regulation, in margins, demand fluctuations,
access to debt or equity financing, adverse uninsured determinations in
existing or future litigation or regulatory proceedings and other risks.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company has not entered into any transactions using derivative
financial instruments.

The Company is exposed to market risk from changes in interest rates. The
Company holds notes receivable that earn interest at variable rates. A
hypothetical one-percentage point change in interest rates would change annual
interest income by $715,000 based on the balances of these variable-rate notes
receivable at December 29, 2002. Changes in interest rates also impact interest
expense on long-term variable-rate debt. A hypothetical one-percentage point
change in interest rates would change annual interest expense by $269,000 based
on the balances of variable-rate long-term debt at
December 29, 2002.

Management believes that market risk as a result of interest rate changes
would have a minimal effect on the fair value of the Companys fixed-rate debt
because the fair value of the Companys debt is traded based more on the
publics perception of the nature of the debt than on any fundamental changes
in the debt markets.

There were no significant changes in the Companys market risk in the
fiscal year ended December 29, 2002, and management foresees no significant
changes in the Companys exposure to fluctuations in interest rates in the near
future.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Financial Statements required by Item 8 are filed as a separate
section of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.




PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information concerning the directors and officers of the Company under
the heading Election of Director to be contained in the Companys Proxy
Statement with respect to the next Annual Meeting of Shareholders is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information under the heading Executive Compensation and the
information under the heading Performance Graph to be contained in the
Companys Proxy Statement with respect to the next Annual Meeting of
Shareholders are incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information under the heading Security Ownership of Certain Beneficial
Owners and Management to be contained in the Companys Proxy Statement with
respect to the next Annual Meeting of Shareholders is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information under the heading Certain Transactions to be contained in the
Companys Proxy Statement with respect to the next Annual Meeting of
Shareholders is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

(a)  Within the ninety day period prior to the filing date of this report,
we carried out an evaluation, under the supervision and with the participation
of our management, including our principal executive officer and our principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934). Based upon that evaluation, our
management, including our principal executive officer and our principal
financial officer, concluded that the design and operation of these disclosure
controls and procedures were effective to timely alert them to any material
information relating to the company (including its
consolidated subsidiaries) that must be included in our periodic SEC filings.

(b)  There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

|    |  |  |    |  |  |                                                                                                                                                                                                                         |  |            
|--- |  |  | -- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|    |  |  |    |  |  |                                                                                                                                                                                                                         |  | Page       
|    |  |  |    |  |  |                                                                                                                                                                                                                         |  |            
|(a) |  |  | 1. |  |  | Financial Statements:                                                                                                                                                                                                   |  |            
|    |  |  |    |  |  | The following Financial Statements are included herein:                                                                                                                                                                 |  |            
|    |  |  |    |  |  | Report of Independent Auditors                                                                                                                                                                                          |  | F-1        
|    |  |  |    |  |  | Consolidated Balance Sheets at December 29, 2002 and
December 30, 2001                                                                                                                                                  |  | F-2  F-3  
|    |  |  |    |  |  | Consolidated Statements of Operations for each of the
three years in the period ended December 29, 2002                                                                                                                 |  | F-4  F-5  
|    |  |  |    |  |  | Consolidated Statements of Shareholders Equity for
each of the three years in the period ended
December 29,     2002                                                                                                   |  | F-6  F-7  
|    |  |  |    |  |  | Consolidated Statements of Cash Flows for each of the
three years in the period ended December 29, 2002                                                                                                                 |  | F-8  F-9  
|    |  |  |    |  |  | Notes to Consolidated Financial Statements                                                                                                                                                                              |  | F-10  F-44
|    |  |  | 2. |  |  | Financial Statement Schedules:                                                                                                                                                                                          |  |            
|    |  |  |    |  |  | Report of Independent Auditors                                                                                                                                                                                          |  | F-1        
|    |  |  |    |  |  | Schedule II  Valuation and Qualifying Accounts                                                                                                                                                                         |  | S-1        
|    |  |  |    |  |  | All other schedules required by Regulation S-X
are omitted as the required information is
inapplicable or the information requested thereby
is set forth in the financial statements or the
notes thereto.              |  |            
|    |  |  | 3. |  |  | Exhibits:                                                                                                                                                                                                               |  |            
|    |  |  |    |  |  | The exhibits required by Item 601 of Regulation
S-K and paragraph (c) of this Item 14 are listed
below. Management contracts and compensatory plans
and arrangements required to be filed as exhibits
to this form are: |  |            
|    |  |  |    |  |  | 10(9)   1991 Stock Option Plan                                                                                                                                                                                         |  |            
|    |  |  |    |  |  | 10(10)  First Amendment to 1991 Stock Option Plan                                                                                                                                                                      |  |            

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| |  |  |  |  |  |                                                     |  |     
| |  |  |  |  |  | --------------------------------------------------- |  | ----
| |  |  |  |  |  |                                                     |  | Page
| |  |  |  |  |  |                                                     |  |     
| |  |  |  |  |  | 10(11)  Second Amendment to 1991 Stock Option Plan |  |     
| |  |  |  |  |  | 10(12)  Key Employee Supplemental Income Plan      |  |     

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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                     
|------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                     
|Number  |  |   |  | Exhibit                                                                                                                                                                                                                                                                                                                                                             
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                     
|3(1)    |  |  |  | Amended and Restated Charter. Incorporated by
reference to the Companys Registration statement on
Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 1991                                                                                                                                                                           
|3(2)    |  |  |  | Articles of Amendment to Charter creating Series A
Subordinated Preferred Stock. Incorporated by
reference to the Companys Registration Statement on
Form 8-A filed with the Commission on July 3, 1997                                                                                                                                                            
|3(3)    |  |  |  | Articles of Amendment to Amended and Restated Charter
dated September 8, 1997. Incorporated by reference to
the Companys Annual Report on Form 10-K, filed with
the Commission on April 13, 1998                                                                                                                                                                   
|3(4)    |  |  |  | Amended and Restated Bylaws. Incorporated by reference
to the Companys Registration statement on Form S-1,
Commission File No. 33-44504, filed with the
Commission on December 12, 1991                                                                                                                                                                            
|3(5)    |  |  |  | Amendment to the Amended and Restated Bylaws adopted
on July 31, 1996. Incorporated by reference to the
Companys Annual Report on Form 10-K, filed with the
Commission on April 13, 1998                                                                                                                                                                           
|4(1)    |  |  |  | Amended and Restated Charter. Section 6 of the Amended
and Restated Charter is included in Exhibit 3(1)                                                                                                                                                                                                                                                             
|4(2)    |  |  |  | Indenture dated as of June 6, 1994, by and between the
Registrant and Third National Bank in Nashville,
Tennessee, Trustee, relating to $54,000,000 in 7 -1/2
Convertible Subordinated Debentures due 2004.
Incorporated by reference to the Companys
Registration Statement on Form S-3, Commission File
No. 33-77910, filed with the Commission on April 19,
1994
|4(3)    |  |  |  | Indenture dated as of November 15, 1996, by and
between the Registrant and Bankers Trust Company,
Trustee, relating to Senior Subordinated Notes.
Incorporated by reference to the Companys Quarterly
Report on Form 10-Q, filed with the Commission on
November 20, 1996                                                                                          
|4(4)    |  |  |  | First Supplemental Indenture dated as of November 15,
1996 by and between the Registrant and Bankers Trust
Company, Trustee, relating to 9 3/4% Senior
Subordinated Notes due 2006, Series A. Incorporated by
reference to the Companys Quarterly Report on Form
10-Q, filed with the Commission on November 20, 1996                                              
|4(5)    |  |  |  | Second Supplemental Indenture dated as of September
25, 1997 by and between the Registrant and Bankers
Trust Company, Trustee, relating to 9.55% Senior
Subordinated Notes due 2007, Series B. Incorporated by
reference to the Companys Current Report on Form 8-K,
filed with the Commission on September 30, 1997                                               

The Registrant agrees to furnish to the Securities and Exchange Commission,
upon request, any and all instruments defining the rights of holders of
long-term debt of the Registrant and its subsidiaries, the total amount of
which does not exceed 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis.

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|        |  |    |  |                                                                                                                                                                                                                                                                                    
|------- |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |    |  |                                                                                                                                                                                                                                                                                    
|Number  |  |    |  | Exhibit                                                                                                                                                                                                                                                                            
|        |  |    |  |                                                                                                                                                                                                                                                                                    
|10(1)   |  |   |  | Amended and Restated Partnership Agreement of
Demonbreun Hotel Associates, Ltd., dated October 22,
1991. Incorporated by reference to the Companys
Registration statement on Form S-1, Commission File
No. 33-44504, filed with the Commission on December
12, 1991               
|10(2)   |  |   |  | Agreement of Limited Partnership of Shoneys Inn
North, Ltd., dated December 31, 1987. Incorporated by
reference to the Companys Registration statement on
Form S-1, Commission File No. 33-44504, filed with
the Commission on December 12, 1991                                 
|10(3)   |  |   |  | Partnership Agreement of Shoneys Inn of Atlanta,
N.E., dated December 26, 1988. Incorporated by
reference to the Companys Registration statement on
Form S-1, Commission File No. 33-44504, filed with
the Commission on December 12, 1991                                       
|10(4)   |  |   |  | Partnership Agreement of Shoneys Inn of Stockbridge,
dated December 26, 1988. Incorporated by reference to
the Companys Registration statement on Form S-1,
Commission File No. 33-44504, filed with the
Commission on December 12, 1991                                         
|10(5)   |  |   |  | Joint Venture Agreement of Atlanta Shoneys Inns
Joint Venture, dated May 4, 1988. Incorporated by
reference to the Companys Registration statement on
Form S-1, Commission File No. 33-44504, filed with
the Commission on December 12, 1991                                     
|10(6)   |  |   |  | Amended and Restated Limited Partnership Agreement of
Shoneys Inn of Gulfport, Ltd., dated January 1,
1987. Incorporated by reference to the Companys
Registration statement on Form S-1, Commission File
No. 33-44504, filed with the Commission on December
12, 1991           
|10(7)   |  | - |  | Second Amended and Restated Limited Partnership
Agreement of Shoneys Inn of Bossier City, Ltd.,
dated January 1, 1987. Incorporated by reference to
the Companys Registration statement on Form S-1,
Commission File No. 33-44504, filed with the
Commission on December 12, 1991
|10(8)   |  |   |  | Second Amended and Restated Limited Partnership
Agreement of Shoneys Inns of New Orleans, Ltd.,
dated January 1, 1987. Incorporated by reference to
the Companys Registration statement on Form S-1,
Commission File No. 33-44504, filed with the
Commission on December 12, 1991
|10(9)   |  |   |  | 1991 Stock Option Plan. Incorporated by reference to
the Companys Registration statement on Form S-8,
filed with the Commission on June 24, 1997                                                                                                                                  
|10(10)  |  |   |  | First Amendment to 1991 Stock Option Plan. Incorporated by
reference to the Companys Registration statement on Form S-8, filed
with the Commission on June 24, 1997                                                                                                               
|10(11)  |  |   |  | Second Amendment to 1991 Stock Option Plan. Incorporated by
reference to the Companys Registration statement on Form S-8, filed
with the Commission on June 24, 1997                                                                                                              
|10(12)  |  |   |  | Key Employee Supplemental Income Plan. Incorporated by reference to
the Companys Registration statement on Form S-1, Commission File No.
33-44504, filed with the Commission on December 12, 1991                                                                                 

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|        |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|Number  |  |    |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|10(13)  |  |   |  | Rights Agreement between the Registrant and SunTrust, Atlanta, as
Rights Agent, dated as of June 27, 1997. Incorporated by reference to
the Companys Registration Statement on Form 8-A filed with the
Commission on July 3, 1997                                                                                                                                                                           
|10(14)  |  | - |  | Loan and Security Agreement by and among The Hotel Group, Inc., as
Borrower, the Registrant, as Holdings, and the financial institutions
that are signatories thereto, the Lenders, and Foothill Capital
Corporation, as Agent, dated as of August 27, 1999. Incorporated by
reference to the Companys Current Report on Form 8-K dated September
15, 1999, filed with the Commission on September 28, 1999.
|10(15)  |  |   |  | Amendment Number One to Loan and Security Agreement between and
among The Hotel Group, Inc., as Borrower, the Registrant, as Holdings,
and the financial institutions that are signatories thereto, the
Lenders, and Foothill Capital Corporation, as Agent, dated as of October
3, 2001. Incorporated by reference to the Companys Annual Report on
Form 10-K, filed with the Commission on April 1, 2002. 
|10(16)  |  |   |  | Amendment Number Two to Loan and Security Agreement between and
among The Hotel Group, Inc., as Borrower, the Registrant, as Holdings,
and the financial institutions that are signatories thereto, the
Lenders, and Foothill Capital Corporation, as Agent, dated as of
November 26, 2002.*                                                                                                                 
|10(17)  |  | - |  | Lease Agreement by and between Southeast Texas Inns, Inc., ad
landlord, and May-Ridge, L.P., as tenant, dated as of July 9, 2000.
Incorporated by reference to the Companys Current Report on Form 8-K
filed with the Commission on July 24, 2000.                                                                                                                                                          
|10(18)  |  | - |  | Amended and Restated License Agreement entered into September 27,
2000 by and between Shoneys Inc., ShoLodge Franchise Systems, Inc and
the Company. Incorporated by reference to the Companys Quarterly
Report on Form 10-Q, filed with the Commission on November 15, 2000.                                                                                                                              
|10(19)  |  | - |  | Purchase and Sale Agreement dated as of April 30, 2002, by and
among ShoLodge, Inc., GuestHouse Franchise Systems, LLC and Surburban
Franchise Holding Company LLC. Incorporated by reference to the
Companys Current Report on Form 8-K/A filed with the Commission on
July 16, 2002.                                                                                                                      
|21      |  |   |  | Subsidiaries of the Registrant*                                                                                                                                                                                                                                                                                                                                                                              
|23(1)   |  |   |  | Consent of Ernst & Young LLP*                                                                                                                                                                                                                                                                                                                                                                                
|99.1    |  |   |  | Certifications required by Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                                   



|*   |  | Filed herewith                                                                      
|--- |  | ------------------------------------------------------------------------------------
|   
|(b) |  | No reports on Form 8-K were filed during the fourth quarter ended
December 29, 2002.
|   
|(c) |  | Exhibits required by Item 601 of Regulation S-K are listed above.                   

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|(d) |  | All financial statement schedules required by Regulation S-X are filed
following the Financial Statements listed above.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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

|                   |  |                                   
|------------------ |  | ----------------------------------
|                   |  | SHOLODGE, INC.                    
|                   |  |                                   
|Date: May 28, 2003 |  | /s/ Leon Moore                    
|                   |  |                                   
|                   |  | Leon Moore
Chief Executive Officer

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

|                                         |  |                                                                                                                 |  |             
|---------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ------------
|Signature                                |  | Title                                                                                                           |  | Date        
|                                         |  |                                                                                                                 |  |             
|/s/ Leon MooreLeon Moore                 |  | President, Chief Executive
Officer, Principal Executive
Officer, Director                                       |  | May 28, 2003
|                                        
|/s/ Bob MarloweBob Marlowe               |  | Secretary, Treasurer, Chief
Financial Officer, Chief
Accounting Officer, Principal
Accounting Officer, Director |  | May 28, 2003
|                                        
|/s/ Richard L. JohnsonRichard L. Johnson |  | Executive Vice President,
Director                                                                              |  | May 28, 2003
|                                        
|/s/ Earl H. SadlerEarl H. Sadler         |  | Director                                                                                                        |  | May 28, 2003
|                                        
|/s/ Helen L. MoskovitzHelen L. Moskovitz |  | Director                                                                                                        |  | May 28, 2003
|                                        
|/s/ David M. ReshaDavid M. Resha         |  | Director                                                                                                        |  | May 28, 2003

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CERTIFICATION

I, Leon Moore, certify that:

1.     I have reviewed this annual report on Form 10-K/A of ShoLodge, Inc.

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions);

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could





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significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                    |  |                                                               
|------------------- |  | --------------------------------------------------------------
|Dated: May 28, 2003 |  | /s/ Leon Moore                                                
|                    |  |                                                               
|                    |  | [signature]                                                   
|                    |  |                                                               
|                    |  | Chairman, Chief Executive Officer,
Principal Executive Officer





---



##### Table of Contents






CERTIFICATION

I, Bob Marlowe, certify that:

1.     I have reviewed this annual report on Form 10-K/A of ShoLodge, Inc.

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions);

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could





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significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                    |  |                                                                                                      
|------------------- |  | -----------------------------------------------------------------------------------------------------
|Dated: May 28, 2003 |  | /s/ Bob Marlowe                                                                                      
|                    |  |                                                                                                      
|                    |  | [signature]                                                                                          
|                    |  |                                                                                                      
|                    |  | Secretary, Treasurer, Chief Accounting
Officer, Principal Accounting Officer,
Chief Financial Officer





---



##### Table of Contents



Report of Independent Auditors

Shareholders and Board of Directors
ShoLodge, Inc.

We have audited the accompanying consolidated balance sheets of ShoLodge, Inc.
and subsidiaries as of December 29, 2002 and December 30, 2001, and the related
consolidated statements of operations, shareholders equity and cash flows for
each of the three years in the period ended December 29, 2002. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ShoLodge, Inc.
and subsidiaries at December 29, 2002 and December 30, 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 29, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

As discussed in Note l to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets.

|                                                                                                |  |                      
|----------------------------------------------------------------------------------------------- |  | ---------------------
|                                                                                                |  | /s/ Ernst & Young LLP
|                                                                                                |  |                      
|Nashville, Tennessee
April 11, 2003, except for Note 15, as to
which the date is April 16, 2003 |  |                      

F-1



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Balance Sheets

|                                               |                                                                              |                                                                                                        |             |              |           |              |             |            |           | 
|---------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------- | ------------ | --------- | ------------ | ----------- | ---------- | --------- | 
|                                               |                                                                              |                                                                                                        |             | December 29, |           | December 30,
|                                               |                                                                              |                                                                                                        |             | 2002         |           | 2001        
|                                               |                                                                              |                                                                                                        |             |              |           |             
|Assets                                         |                                                                              |                                                                                                        |             |              |           |              |             |           
|Current assets:                                |                                                                              |                                                                                                        |             |              |           |              |             |           
|                                               | Cash and cash equivalents                                                    |                                                                                                        | $           | 1,534,942    |           |              | $           | 2,704,161  |          
|                                               | Restricted cash                                                              |                                                                                                        |             | 100,000      |           |              |             | 200,000    |          
|                                               | Accounts receivable:                                                         |                                                                                                        |             |              |           |              |             |            |          
|                                               |                                                                              | Trade, net of allowance for doubtful
accounts of $394,480 and $184,404 for 2002
and 2001, respectively |             |              | 1,944,357 |              |             |            | 3,218,766 | 
|                                               |                                                                              | Construction contracts                                                                                 |             |              | 136,865   |              |             |            | 4,016,502 | 
|                                               |                                                                              | Construction contracts due from related
parties                                                        |             |              | 5,671,892 |              |             |            |          | 
|                                               |                                                                              | Costs and estimated earnings in excess of
billings on construction contracts                           |             |              |          |              |             |            | 3,063,747 | 
|                                               | Income taxes receivable                                                      |                                                                                                        |             | 9,900,782    |           |              |             |           |          
|                                               | Prepaid expenses                                                             |                                                                                                        |             | 319,595      |           |              |             | 365,849    |          
|                                               | Notes receivable, net                                                        |                                                                                                        |             | 44,823,055   |           |              |             | 2,067,165  |          
|                                               | Assets of hotels transferred under contractual
agreements (notes receivable) |                                                                                                        |             | 11,571,564   |           |              |             | 18,204,682 |          
|                                               | Other current assets                                                         |                                                                                                        |             | 121,777      |           |              |             | 110,491    |          
|                                               |                                                                              |                                                                                                        |             |              |           |              |             |           
|Total current assets                           |                                                                              |                                                                                                        | 76,124,829  |              |           |              | 33,951,363  |           
|Restricted cash                                |                                                                              |                                                                                                        |            |              |           |              | 1,781,747   |           
|Notes receivable, net                          |                                                                              |                                                                                                        | 7,065,318   |              |           |              | 68,227,306  |           
|Property and equipment                         |                                                                              |                                                                                                        | 81,882,722  |              |           |              | 98,619,837  |           
|Less accumulated depreciation and amortization |                                                                              |                                                                                                        | (16,297,988 | )            |           |              | (15,522,304 | )         
|                                               |                                                                              |                                                                                                        |             |              |           |              |             |           
|                                               |                                                                              |                                                                                                        | 65,584,734  |              |           |              | 83,097,533  |           
|Land under development or held for sale        |                                                                              |                                                                                                        | 14,114,353  |              |           |              | 9,254,986   |           
|Deferred charges, net                          |                                                                              |                                                                                                        | 1,790,320   |              |           |              | 2,087,512   |           
|Goodwill, net                                  |                                                                              |                                                                                                        | 765,711     |              |           |              | 2,387,100   |           
|Trademarks and franchise rights, net           |                                                                              |                                                                                                        | 703,366     |              |           |              | 4,421,741   |           
|Other assets                                   |                                                                              |                                                                                                        | 1,130,527   |              |           |              | 1,377,361   |           
|                                               |                                                                              |                                                                                                        |             |              |           |              |             |           
|                                               |                                                                              | $                                                                                                      | 167,279,158 |              |           | $            | 206,586,649 |           
|                                               |                                                                              |                                                                                                        |             |              |           |              |             |           

F-2



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Balance Sheets (continued)

|                                                                           |                                                                                                                                                                              |   |              |            |              |   |             |            |  
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | ---------- | ------------ | - | ----------- | ---------- | -
|                                                                           |                                                                                                                                                                              |   | December 29, |            | December 30,
|                                                                           |                                                                                                                                                                              |   | 2002         |            | 2001        
|                                                                           |                                                                                                                                                                              |   |              |            |             
|Liabilities                                                                |                                                                                                                                                                              |   |              |            |              |   |             |           
|Current liabilities:                                                       |                                                                                                                                                                              |   |              |            |              |   |             |           
|                                                                           | Accounts payable and accrued expenses                                                                                                                                        |   | $            | 10,623,527 |              |   | $           | 14,171,631 |  
|                                                                           | Taxes payable other than on income                                                                                                                                           |   |              | 609,259    |              |   |             | 476,809    |  
|                                                                           | Income taxes payable                                                                                                                                                         |   |              |           |              |   |             | 3,859,873  |  
|                                                                           | Current portion of long-term debt                                                                                                                                            |   |              | 67,548,511 |              |   |             | 4,058,700  |  
|                                                                           |                                                                                                                                                                              |   |              |            |              |   |             |           
|Total current liabilities                                                  |                                                                                                                                                                              |   | 78,781,297   |            |              |   | 22,567,013  |           
|Long-term debt, less current portion                                       |                                                                                                                                                                              |   | 24,381,276   |            |              |   | 86,293,381  |           
|Deferred income taxes                                                      |                                                                                                                                                                              |   |             |            |              |   | 992,275     |           
|Deferred gain on sale/leaseback                                            |                                                                                                                                                                              |   |             |            |              |   | 4,129,962   |           
|Deferred credits                                                           |                                                                                                                                                                              |   | 2,314,922    |            |              |   | 2,545,004   |           
|Minority interests in equity of
consolidated subsidiaries and
partnerships |                                                                                                                                                                              |   | 607,493      |            |              |   | 786,477     |           
|                                                                           |                                                                                                                                                                              |   |              |            |              |   |             |           
|Total liabilities                                                          |                                                                                                                                                                              |   | 106,084,988  |            |              |   | 117,314,112 |           
|Shareholders equity:                                                      |                                                                                                                                                                              |   |              |            |              |   |             |           
|                                                                           | Preferred stock (no par value;
1,000,000 shares authorized; no
shares issued)                                                                                                |   |              |           |              |   |             |           |  
|                                                                           | Series A redeemable nonparticipating
stock (no par value; 1,000 shares
authorized; no shares issued)                                                                         |   |              |           |              |   |             |           |  
|                                                                           | Common stock (no par value;
20,000,000 shares authorized,
5,118,778 and 5,088,278 shares
issued and outstanding as of
December 29, 2002 and December 30,
2001, respectively) |   |              | 1,000      |              |   |             | 1,000      |  
|                                                                           | Additional paid-in capital                                                                                                                                                   |   |              | 23,579,621 |              |   |             | 23,519,506 |  
|                                                                           | Retained earnings                                                                                                                                                            |   |              | 38,753,965 |              |   |             | 67,001,529 |  
|                                                                           | Unrealized gain on securities
available-for-sale, net of income
taxes                                                                                                        |   |              |           |              |   |             | 100,307    |  
|                                                                           | Notes receivable from officer, net
of discount of $140,833 and $181,444
as of December 29, 2002 and December
30, 2001, respectively                                          |   |              | (1,140,416 | )            |   |             | (1,349,805 | )
|                                                                           |                                                                                                                                                                              |   |              |            |              |   |             |           
|                                                                           | Total shareholders equity                                                                                                                                                   |   |              | 61,194,170 |              |   |             | 89,272,537 |  
|                                                                           |                                                                                                                                                                              |   |              |            |              |   |             |           
|                                                                           |                                                                                                                                                                              | $ | 167,279,158  |            |              | $ | 206,586,649 |           
|                                                                           |                                                                                                                                                                              |   |              |            |              |   |             |           

See accompanying notes.

F-3



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ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Operations

|                                                                                      |                                                |                |                |            |              |            |              |            |              |            |             |            |            |            | 
|------------------------------------------------------------------------------------- | ---------------------------------------------- | -------------- | -------------- | ---------- | ------------ | ---------- | ------------ | ---------- | ------------ | ---------- | ----------- | ---------- | ---------- | ---------- | 
|                                                                                      |                                                |                |                |            | Year ended  
|                                                                                      |                                                |                |                |            |             
|                                                                                      |                                                |                |                |            | December 29, |            | December 30, |            | December 31,
|                                                                                      |                                                |                |                |            | 2002         |            | 2001         |            | 2000        
|                                                                                      |                                                |                |                |            |              |            |              |            |             
|Revenues:                                                                             |                                                |                |                |            |              |            |              |            |              |            |             |           
|                                                                                      | Hotel                                          |                | $              | 8,872,656  |              |            | $            | 7,782,732  |              |            | $           | 40,677,658 |           
|                                                                                      | Franchising, reservation and management        |                |                | 6,083,606  |              |            |              | 3,970,821  |              |            |             | 3,606,243  |           
|                                                                                      | Construction and development  related parties |                |                | 5,687,874  |              |            |              | 34,992     |              |            |             | 114,886    |           
|                                                                                      | Construction and development  other           |                |                | 4,224,408  |              |            |              | 27,444,893 |              |            |             | 11,921,858 |           
|                                                                                      | Rent                                           |                |                | 3,397,640  |              |            |              | 3,467,744  |              |            |             | 1,955,324  |           
|                                                                                      | Other income                                   |                |                | 66,993     |              |            |              | 336,595    |              |            |             | 48,982     |           
|                                                                                      |                                                |                |                |            |              |            |              |            |              |            |             |           
|                                                                                      |                                                | Total revenues |                |            | 28,333,177   |            |              |            | 43,037,777   |            |             |            | 58,324,951 |           
|Costs and expenses:                                                                   |                                                |                |                |            |              |            |              |            |              |            |             |           
|                                                                                      | Hotel                                          |                |                | 7,108,274  |              |            |              | 5,856,870  |              |            |             | 29,553,596 |           
|                                                                                      | Franchising, reservation and management        |                |                | 4,275,949  |              |            |              | 2,191,659  |              |            |             | 2,459,801  |           
|                                                                                      | Construction and development                   |                |                | 12,119,271 |              |            |              | 25,691,829 |              |            |             | 12,571,160 |           
|                                                                                      | Rent expense                                   |                |                | 583,904    |              |            |              | 581,900    |              |            |             | 10,332,830 |           
|                                                                                      | General and administrative                     |                |                | 7,982,733  |              |            |              | 5,859,873  |              |            |             | 5,010,455  |           
|                                                                                      | Depreciation and amortization                  |                |                | 3,335,750  |              |            |              | 3,392,385  |              |            |             | 4,501,517  |           
|                                                                                      | Write-off of pre-development costs             |                |                | 1,863,628  |              |            |              |           |              |            |             |           |           
|                                                                                      | Write-off of construction contracts receivable |                |                | 3,631,267  |              |            |              |           |              |            |             |           |           
|                                                                                      | Write-off of trade receivables                 |                |                | 1,296,558  |              |            |              |           |              |            |             |           |           
|                                                                                      | Write-off of goodwill                          |                |                | 2,387,100  |              |            |              |           |              |            |             |           |           
|                                                                                      | Write-off of trademarks and franchise rights   |                |                | 4,421,535  |              |            |              |           |              |            |             |           |           
|                                                                                      | Write-down of notes receivable                 |                |                | 21,167,013 |              |            |              |           |              |            |             |           |           
|                                                                                      | Impairment of real estate                      |                |                | 644,195    |              |            |              |           |              |            |             |           |           
|                                                                                      |                                                |                |                |            |              |            |              |            |              |            |             |           
|                                                                                      |                                                |                | Total expenses |            |              | 70,817,177 |              |            |              | 43,574,516 |             |            |            | 64,429,359 | 
|                                                                                      |                                                |                |                |            |              |            |              |            |              |            |             |           
|Operating loss                                                                        |                                                |                | (42,484,000    | )          |              |            | (536,739     | )          |              |            | (6,104,408  | )         
|Gain on sale of land and leasehold interests                                          |                                                |                | 627,635        |            |              |            | 3,761,090    |            |              |            | 4,901,523   |           
|Gain on sale of available-for-sale securities                                         |                                                |                | 314,988        |            |              |            |             |            |              |            |            |           
|Gain on early extinguishment of debt                                                  |                                                |                | 2,592,038      |            |              |            | 912,719      |            |              |            | 7,306,645   |           
|Interest expense                                                                      |                                                |                | (8,782,207     | )          |              |            | (8,281,034   | )          |              |            | (10,245,276 | )         
|Interest income                                                                       |                                                |                | 5,016,345      |            |              |            | 6,376,068    |            |              |            | 6,396,819   |           
|Arbitration award                                                                     |                                                |                | 8,900,000      |            |              |            |             |            |              |            |            |           
|                                                                                      |                                                |                |                |            |              |            |              |            |              |            |             |           
|(Loss) earnings from continuing operations
before income taxes and minority interests |                                                |                | (33,815,201    | )          |              |            | 2,232,104    |            |              |            | 2,255,303   |           
|Income tax benefit (expense)                                                          |                                                |                | 8,958,859      |            |              |            | (785,000     | )          |              |            | (1,220,000  | )         
|Minority interests in loss (earnings) of
consolidated subsidiaries and partnerships   |                                                |                | 178,986        |            |              |            | (58,255      | )          |              |            | (57,246     | )         
|                                                                                      |                                                |                |                |            |              |            |              |            |              |            |             |           
|(Loss) earnings from continuing operations                                            |                                                |                | (24,677,356    | )          |              |            | 1,388,849    |            |              |            | 978,057     |           

F-4



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Operations (continued)

|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |          |           |      |       |  
|------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ------------------------ | -------------------------------------------------------- | --------- | ------------ | ------- | ------------ | --------- | ------------ | ------- | -------- | --------- | ---- | ----- | -
|                                            |                                                                                                                                                       |         |                          |                                                          |           | Year ended  
|                                            |                                                                                                                                                       |         |                          |                                                          |           |             
|                                            |                                                                                                                                                       |         |                          |                                                          |           | December 29, |         | December 30, |           | December 31,
|                                            |                                                                                                                                                       |         |                          |                                                          |           | 2002         |         | 2001         |           | 2000        
|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |             
|Discontinued operations:                    |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|                                            | Operations of hotels disposed of and
transferred, net of income tax benefit of
$402,000, $293,000, and $245,000 for 2002,
2001 and 2000, respectively |         |                          | (656,333                                                 | )         |              |         | (477,304     | )         |              |         | (400,395 | )        
|                                            | Loss on disposal and transfer of discontinued
operations, net of income tax benefit of $1,786,000                                                     |         |                          | (2,913,875                                               | )         |              |         |             |           |              |         |         |          
|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|Net (loss) earnings                         |                                                                                                                                                       | $       | (28,247,564              | )                                                        |           | $            | 911,545 |              |           | $            | 577,662 |         
|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|Net (loss) earnings per common share:       |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|                                            |                                                                                                                                                       | Basic:  |                          |                                                          |           |              |         |              |           |              |         |          |           |     
|                                            |                                                                                                                                                       |         | Continuing operations    |                                                          | $         | (4.83        | )       |              | $         | 0.25         |         |          | $         | 0.18 |      
|                                            |                                                                                                                                                       |         | Discontinued operations: |                                                          |           |              |         |              |           |              |         |          |           |      |      
|                                            |                                                                                                                                                       |         |                          | Operations of hotels disposed of and
transferred         |           |              | (0.12   | )            |           |              | (0.09   | )        |           |      | (0.07 | )
|                                            |                                                                                                                                                       |         |                          | Loss on disposal and transfer of
discontinued
operations |           |              | (0.57   | )            |           |              |        |          |           |      |      |  
|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|                                            |                                                                                                                                                       |         | Net (loss) earnings      |                                                          | $         | (5.52        | )       |              | $         | 0.16         |         |          | $         | 0.11 |      
|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|                                            | Diluted:                                                                                                                                              |         |                          |                                                          |           |              |         |              |           |              |         |          |          
|                                            |                                                                                                                                                       |         | Continuing operations    |                                                          | $         | (4.83        | )       |              | $         | 0.25         |         |          | $         | 0.18 |      
|                                            |                                                                                                                                                       |         | Discontinued operations: |                                                          |           |              |         |              |           |              |         |          |           |      |      
|                                            |                                                                                                                                                       |         |                          | Operations of hotels disposed of and
transferred         |           |              | (0.12   | )            |           |              | (0.09   | )        |           |      | (0.08 | )
|                                            |                                                                                                                                                       |         |                          | Loss on disposal and transfer of
discontinued
operations |           |              | (0.57   | )            |           |              |        |          |           |      |      |  
|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|                                            |                                                                                                                                                       |         | Net (loss) earnings      |                                                          | $         | (5.52        | )       |              | $         | 0.16         |         |          | $         | 0.10 |      
|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|Weighted average common shares outstanding: |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|                                            |                                                                                                                                                       | Basic   |                          |                                                          | 5,113,953 |              |         |              | 5,464,533 |              |         |          | 5,471,962 |     
|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         
|                                            |                                                                                                                                                       | Diluted |                          |                                                          | 5,113,953 |              |         |              | 5,529,825 |              |         |          | 5,553,852 |     
|                                            |                                                                                                                                                       |         |                          |                                                          |           |              |         |              |           |              |         |         

See accompanying notes

F-5



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity

Years ended December 29, 2002, December 30, 2001 and December 31, 2000

|                           |                                                                                                     |  |              |          |                 |   |            |   |         |   |            |            |   |   |            |            |  
|-------------------------- | --------------------------------------------------------------------------------------------------- |  | ------------ | -------- | --------------- | - | ---------- | - | ------- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                           |                                                                                                     |  | Common Stock |          | Notes           |   | Additional
|                           |                                                                                                     |  |              |          | Receivable From |   | Paid-In   
|                           |                                                                                                     |  | Shares       |          | Amount          |   | Officer    |   | Capital
|                           |                                                                                                     |  |              |          |                 |   |            |   |        
|Balance, December 26, 1999 |                                                                                                     |  | 5,372,578    |          |                 | $ | 1,000      |   |         | $ |           |            |   | $ | 25,284,696 |           
|                           | Exercise of stock options, net                                                                      |  |              | 1,067    |                 |   |            |  |         |   |            |           |   |   |            | 4,001      |  
|                           | Notes receivable from officer
for exercise of options to
purchase common stock                      |  |              | 408,333  |                 |   |            |  |         |   |            | (1,247,750 | ) |   |            | 1,352,603  |  
|                           | Net earnings                                                                                        |  |              |         |                 |   |            |  |         |   |            |           |   |   |            |           |  
|                           | Change in unrealized gain on
securities available-for-sale,
net of income taxes                     |  |              |         |                 |   |            |  |         |   |            |           |   |   |            |           |  
|                           | Comprehensive earnings                                                                              |  |              |          |                 |   |            |   |         |   |            |            |   |   |            |            |  
|                           | Common stock repurchased                                                                            |  |              | (237,767 | )               |   |            |  |         |   |            |           |   |   |            | (1,216,125 | )
|                           |                                                                                                     |  |              |          |                 |   |            |   |         |   |            |            |   |   |            |           
|Balance, December 31, 2000 |                                                                                                     |  | 5,544,211    |          |                 |   | 1,000      |   |         |   | (1,247,750 | )          |   |   | 25,425,175 |           
|                           | Exercise of stock options, net                                                                      |  |              | 1,067    |                 |   |            |  |         |   |            |           |   |   |            | 4,001      |  
|                           | Interest accreted on notes
receivable from officer for
exercise of options to purchase
common stock |  |              |         |                 |   |            |  |         |   |            | (102,055   | ) |   |            |           |  
|                           | Net earnings                                                                                        |  |              |         |                 |   |            |  |         |   |            |           |   |   |            |           |  
|                           | Change in unrealized gain on
securities available-for-sale,
net of income taxes                     |  |              |         |                 |   |            |  |         |   |            |           |   |   |            |           |  
|                           | Comprehensive earnings                                                                              |  |              |          |                 |   |            |   |         |   |            |            |   |   |            |            |  
|                           | Common stock repurchased                                                                            |  |              | (457,000 | )               |   |            |  |         |   |            |           |   |   |            | (1,909,670 | )
|                           |                                                                                                     |  |              |          |                 |   |            |   |         |   |            |            |   |   |            |           
|Balance, December 30, 2001 |                                                                                                     |  | 5,088,278    |          |                 |   | 1,000      |   |         |   | (1,349,805 | )          |   |   | 23,519,506 |           
|                           | Exercise of stock options, net                                                                      |  |              | 55,500   |                 |   |            |  |         |   |            |           |   |   |            | 208,125    |  
|                           | Payment received on notes
receivable from officer                                                   |  |              |         |                 |   |            |  |         |   |            | 250,000    |   |   |            |           |  
|                           | Interest accreted on notes
receivable from officer for
exercise of options to purchase
common stock |  |              |         |                 |   |            |  |         |   |            | (40,611    | ) |   |            |           |  
|                           | Net loss                                                                                            |  |              |         |                 |   |            |  |         |   |            |           |   |   |            |           |  
|                           | Change in unrealized gain on
securities available-for-sale,
net of income taxes                     |  |              |         |                 |   |            |  |         |   |            |           |   |   |            |           |  
|                           | Comprehensive loss                                                                                  |  |              | (25,000  | )               |   |            |  |         |   |            |           |   |   |            | (148,010   | )
|                           | Common stock repurchased                                                                            |  |              | (25,000  | )               |   |            |  |         |   |            |           |   |   |            | (148,010   | )
|                           |                                                                                                     |  |              |          |                 |   |            |   |         |   |            |            |   |   |            |           
|Balance, December 29, 2002 |                                                                                                     |  | 5,118,778    |          |                 | $ | 1,000      |   |         | $ | (1,140,416 | )          |   | $ | 23,579,621 |           
|                           |                                                                                                     |  |              |          |                 |   |            |   |         |   |            |            |   |   |            |           

F-6



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity (continued)

Years ended December 29, 2002, December 30, 2001, and December 31, 2000

|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |             |  
|-------------------------- | --------------------------------------------------------------------------------------------------- | - | ---------- | ----------- | -------------------- | - | ------- | -------- | - | - | ---------- | ----------- | -
|                           |                                                                                                     |   | Retained   |             | Accumulated Other    |   |         |          |  
|                           |                                                                                                     |   | Earnings   |             | Comprehensive Income |   | Total  
|                           |                                                                                                     |   |            |             |                      |   |        
|Balance, December 26, 1999 |                                                                                                     | $ | 65,512,322 |             |                      | $ | 80,321  |          |   | $ | 90,878,339 |            
|                           | Exercise of stock options, net                                                                      |   |            |            |                      |   |         |         |   |   |            | 4,001       |  
|                           | Notes receivable from officer for
exercise of options to purchase
common stock                      |   |            |            |                      |   |         |         |   |   |            | 104,853     |  
|                           | Net earnings                                                                                        |   |            | 577,662     |                      |   |         |         |   |   |            | 577,662     |  
|                           | Change in unrealized gain on
securities available-for-sale,
net of income taxes                     |   |            |            |                      |   |         | (27,090  | ) |   |            | (27,090     | )
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            
|                           | Comprehensive earnings                                                                              |   |            |             |                      |   |         |          |   |   |            | 550,572     |  
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            
|                           | Common stock repurchased                                                                            |   |            |            |                      |   |         |         |   |   |            | (1,216,125  | )
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            
|Balance, December 31, 2000 |                                                                                                     |   | 66,089,984 |             |                      |   | 53,231  |          |   |   | 90,321,640 |            
|                           | Exercise of stock options, net                                                                      |   |            |            |                      |   |         |         |   |   |            | 4,001       |  
|                           | Interest accreted on notes
receivable from officer for
exercise of options to purchase
common stock |   |            |            |                      |   |         |         |   |   |            | (102,055    | )
|                           | Net earnings                                                                                        |   |            | 911,545     |                      |   |         |         |   |   |            | 911,545     |  
|                           | Change in unrealized gain on
securities available-for-sale,
net of income taxes                     |   |            |            |                      |   |         | 47,076   |   |   |            | 47,076      |  
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            
|                           | Comprehensive earnings                                                                              |   |            |             |                      |   |         |          |   |   |            | 958,621     |  
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            
|                           | Common stock repurchased                                                                            |   |            |            |                      |   |         |         |   |   |            | (1,909,670  | )
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            
|Balance, December 30, 2001 |                                                                                                     |   | 67,001,529 |             |                      |   | 100,307 |          |   |   | 89,272,537 |            
|                           | Exercise of stock options, net                                                                      |   |            |            |                      |   |         |         |   |   |            | 208,125     |  
|                           | Payment received on notes
receivable from officer                                                   |   |            |            |                      |   |         |         |   |   |            | 250,000     |  
|                           | Interest accreted on notes
receivable from officer for
exercise of options to
purchase common stock |   |            |            |                      |   |         |         |   |   |            | (40,611     | )
|                           | Net loss                                                                                            |   |            | (28,247,564 | )                    |   |         |         |   |   |            | (28,247,564 | )
|                           | Change in unrealized gain on
securities available-for-sale,
net of income taxes                     |   |            |            |                      |   |         | (100,307 | ) |   |            | (100,307    | )
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            
|                           | Comprehensive loss                                                                                  |   |            |             |                      |   |         |          |   |   |            | (28,347,871 | )
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            
|                           | Common stock repurchased                                                                            |   |            |            |                      |   |         |         |   |   |            | (148,010    | )
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            
|Balance, December 29, 2002 |                                                                                                     | $ | 38,753,965 |             |                      | $ |        |          |   | $ | 61,194,170 |            
|                           |                                                                                                     |   |            |             |                      |   |         |          |   |   |            |            

See accompanying notes.

F-7



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

|                                                                                                     |                                                                                    |                                                                              |             |              |             |              |           |             |            |   |            |            |            |  
|---------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------- | ------------ | ----------- | ------------ | --------- | ----------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                                                                     |                                                                                    |                                                                              |             | Year ended  
|                                                                                                     |                                                                                    |                                                                              |             |             
|                                                                                                     |                                                                                    |                                                                              |             | December 29, |             | December 30, |           | December 31
|                                                                                                     |                                                                                    |                                                                              |             | 2002         |             | 2001         |           | 2000       
|                                                                                                     |                                                                                    |                                                                              |             |              |             |              |           |            
|Cash flows from operating activities                                                                 |                                                                                    |                                                                              |             |              |             |              |           |             |            |   |            |           
|Net (Loss) earnings                                                                                  |                                                                                    | $                                                                            | (28,247,564 | )            |             | $            | 911,545   |             |            | $ | 577,662    |           
|Adjustments to reconcile net (loss) earnings to
net cash (used in) provided by operating
activities: |                                                                                    |                                                                              |             |              |             |              |           |             |            |   |            |           
|                                                                                                     | Loss from discontinued operations                                                  |                                                                              |             | 3,570,208    |             |              |           | 477,304     |            |   |            | 400,395    |           
|                                                                                                     | Depreciation and amortization                                                      |                                                                              |             | 3,335,750    |             |              |           | 3,392,385   |            |   |            | 4,501,517  |           
|                                                                                                     | Write-off of pre-development costs                                                 |                                                                              |             | 1,863,628    |             |              |           |            |            |   |            |           |           
|                                                                                                     | Write-off of construction contracts
receivable                                     |                                                                              |             | 3,631,267    |             |              |           |            |            |   |            |           |           
|                                                                                                     | Write-off of trade receivables                                                     |                                                                              |             | 1,296,558    |             |              |           |            |            |   |            |           |           
|                                                                                                     | Write-off of goodwill and other intangible
assets                                  |                                                                              |             | 6,808,635    |             |              |           |            |            |   |            |           |           
|                                                                                                     | Write-down of notes receivable                                                     |                                                                              |             | 21,167,013   |             |              |           |            |            |   |            |           |           
|                                                                                                     | Impairment of real estate                                                          |                                                                              |             | 644,195      |             |              |           |            |            |   |            |           |           
|                                                                                                     | Amortization of deferred charges recorded as
interest expense                      |                                                                              |             | 567,800      |             |              |           | 603,385     |            |   |            | 713,275    |           
|                                                                                                     | Accretion of debt recorded as interest
expense                                     |                                                                              |             | 353,241      |             |              |           |            |            |   |            |           |           
|                                                                                                     | Recognition of previously deferred gains                                           |                                                                              |             | (230,082     | )           |              |           | (305,391    | )          |   |            | (2,684,184 | )         
|                                                                                                     | Gain on sale of land and leasehold interests                                       |                                                                              |             | (627,635     | )           |              |           | (3,761,090  | )          |   |            | (4,901,523 | )         
|                                                                                                     | Gain on sale of available-for-sale securities                                      |                                                                              |             | (314,988     | )           |              |           |            |            |   |            |           |           
|                                                                                                     | Gain on early extinguishments of debt                                              |                                                                              |             | (2,592,038   | )           |              |           | (912,719    | )          |   |            | (7,306,645 | )         
|                                                                                                     | Deferred income tax (benefit) expense                                              |                                                                              |             | (992,275     | )           |              |           | (3,298,148  | )          |   |            | 2,201,125  |           
|                                                                                                     | Minority interest in (loss) earnings of
consolidated subsidiaries and partnerships |                                                                              |             | (178,984     | )           |              |           | 58,255      |            |   |            | 57,246     |           
|                                                                                                     | Stock-based compensation                                                           |                                                                              |             |             |             |              |           |            |            |   |            | 151,955    |           
|                                                                                                     | Changes in assets and liabilities:                                                 |                                                                              |             |              |             |              |           |             |            |   |            |            |           
|                                                                                                     |                                                                                    | Trade receivables                                                            |             |              | 162,140     |              |           |             | (926,097   | ) |            |            | 2,221,758  |  
|                                                                                                     |                                                                                    | Construction contracts receivable                                            |             |              | 248,370     |              |           |             | (1,610,873 | ) |            |            | 5,268,475  |  
|                                                                                                     |                                                                                    | Construction contracts receivable from
related parties                       |             |              | (5,671,892  | )            |           |             |           |   |            |            |           |  
|                                                                                                     |                                                                                    | Costs and estimated earnings in
excess of billings on construction
contracts |             |              | 3,063,747   |              |           |             | (3,020,903 | ) |            |            | 3,545,227  |  
|                                                                                                     |                                                                                    | Income taxes receivable and payable and
taxes payable other than on income   |             |              | (13,226,205 | )            |           |             | 9,480,496  |   |            |            | (1,560,619 | )
|                                                                                                     |                                                                                    | Prepaid expenses                                                             |             |              | 46,254      |              |           |             | (54,336    | ) |            |            | 261,551    |  
|                                                                                                     |                                                                                    | Other assets                                                                 |             |              | 92,185      |              |           |             | 361,395    |   |            |            | 829,049    |  
|                                                                                                     |                                                                                    | Accounts payable and accrued expenses                                        |             |              | (3,508,831  | )            |           |             | 6,653,310  |   |            |            | (5,419,990 | )
|                                                                                                     |                                                                                    |                                                                              |             |              |             |              |           |             |            |   |            |           
|Net cash (used in) provided by operating activities                                                  |                                                                                    |                                                                              | (8,739,503  | )            |             |              | 8,048,518 |             |            |   | (1,143,726 | )         

F-8



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (continued)

|                                                     |                                                     |   |              |             |              |   |              |             |   |   |             |             |  
|---------------------------------------------------- | --------------------------------------------------- | - | ------------ | ----------- | ------------ | - | ------------ | ----------- | - | - | ----------- | ----------- | -
|                                                     |                                                     |   | Year ended  
|                                                     |                                                     |   |             
|                                                     |                                                     |   | December 29, |             | December 30, |   | December 31,
|                                                     |                                                     |   | 2002         |             | 2001         |   | 2000        
|                                                     |                                                     |   |              |             |              |   |             
|Cash flows from investing activities                 |                                                     |   |              |             |              |   |              |             |   |   |             |            
|                                                     | Restricted cash                                     |   |              | 1,881,747   |              |   |              | 12,624,732  |   |   |             | (12,788,021 | )
|                                                     | Payments received on notes receivable               |   |              | 971,074     |              |   |              | 681,433     |   |   |             | 418,098     |  
|                                                     | Capital expenditures                                |   |              | (3,946,415  | )            |   |              | (20,931,949 | ) |   |             | (8,830,699  | )
|                                                     | Proceeds from sale of equipment                     |   |              |            |              |   |              |            |   |   |             | 538,725     |  
|                                                     | Proceeds from sale of land and leasehold
interests  |   |              | 6,364,023   |              |   |              | 2,907,258   |   |   |             | 53,513,105  |  
|                                                     | Proceeds from sale of available-for-sale
securities |   |              | 428,415     |              |   |              |            |   |   |             |            |  
|                                                     | Deposits on sale/leaseback of hotels                |   |              |            |              |   |              |            |   |   |             | (4,295,000  | )
|                                                     | Acquisitions                                        |   |              | (1,839,491  | )            |   |              |            |   |   |             |            |  
|                                                     |                                                     |   |              |             |              |   |              |             |   |   |             |            
|Net cash provided by (used in) investing
activities  |                                                     |   | 3,859,353    |             |              |   | (4,718,526   | )           |   |   | 28,556,208  |            
|Cash flows from financing activities                 |                                                     |   |              |             |              |   |              |             |   |   |             |            
|                                                     | Payments received on notes receivable from
officer  |   |              | 250,000     |              |   |              |            |   |   |             |            |  
|                                                     | Deferred loan costs                                 |   |              | (415,687    | )            |   |              | (474,068    | ) |   |             | (201,424    | )
|                                                     | Proceeds from long-term debt                        |   |              | 32,093,000  |              |   |              | 7,500,000   |   |   |             | 22,500,500  |  
|                                                     | Payments on long-term debt                          |   |              | (28,276,497 | )            |   |              | (11,085,783 | ) |   |             | (46,095,258 | )
|                                                     | Payments on capitalized lease obligations           |   |              |            |              |   |              |            |   |   |             | (189,590    | )
|                                                     | Distributions to minority interests                 |   |              |            |              |   |              |            |   |   |             | (261,834    | )
|                                                     | Exercise of stock options                           |   |              | 208,125     |              |   |              | 4,001       |   |   |             | 4,001       |  
|                                                     | Purchases of treasury stock                         |   |              | (148,010    | )            |   |              | (1,909,670  | ) |   |             | (1,216,125  | )
|                                                     |                                                     |   |              |             |              |   |              |             |   |   |             |            
|Net cash provided by (used in) financing
activities  |                                                     |   | 3,710,931    |             |              |   | (5,965,520   | )           |   |   | (25,459,730 | )          
|                                                     |                                                     |   |              |             |              |   |              |             |   |   |             |            
|Net (decrease) increase in cash and cash
equivalents |                                                     |   | (1,169,219   | )           |              |   | (2,635,528   | )           |   |   | 1,952,752   |            
|Cash and cash equivalents   beginning of year       |                                                     |   | 2,704,161    |             |              |   | 5,339,689    |             |   |   | 3,386,937   |            
|                                                     |                                                     |   |              |             |              |   |              |             |   |   |             |            
|Cash and cash equivalents   end of year             |                                                     | $ | 1,534,942    |             |              | $ | 2,704,161    |             |   | $ | 5,339,689   |            
|                                                     |                                                     |   |              |             |              |   |              |             |   |   |             |            

See accompanying notes.

F-9



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Years ended December 29, 2002, December 30, 2001 and December 31, 2000

1. Summary of Significant Accounting Policies

The business activities of ShoLodge, Inc. and subsidiaries (the Company) are
composed primarily of owning, franchising, operating, and leasing lodging
facilities, providing reservation services to franchisees and other hotel
chains, and commercial construction. Presently, the Company operates three
hotel brands: Shoneys Inns, GuestHouse Inns & Suites, and AmeriSuites. As of
December 29, 2002, the Company derived its hotel revenues from eight owned
properties located in six states across the United States. Of these eight
properties, three are located in Texas, one in Mississippi, one in Georgia, one
in New Mexico, one in Virginia and one in Alabama. One of the properties is a
Shoneys Inn, five are GuestHouse Inns & Suites, and two are AmeriSuites
hotels.

The Consolidated Financial Statementsinclude the accounts of the Company and
its majority-owned subsidiaries and partnerships. All significant intercompany
items and transactions have been eliminated. The Company is the managing
general partner in the partnership entities.

The Fiscal Yearof the Company consists of 52/53 weeks ending the last Sunday
of the calendar year.

Accounting Estimates.The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Estimates also affect the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.

Risks and Uncertainties.As discussed in Note 10, the Company derived
significant amounts of its construction and development revenues in 2002 from
related parties. The Companys operations would be significantly impacted by a
decline in services provided to these related parties. Consequently, any such
decline could have a detrimental effect on the financial position and results
of operations of the Company.

Cash and Cash Equivalentsinclude highly liquid investments with original
maturities of three months or less.

F-10



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##### Table of Contents



Restricted Cashat December 29, 2002 represents a $100,000 cash collateral
account at one of the Companys major banks. This amount is held by the bank
to facilitate the transaction clearing process.

Accounts Receivable from Construction Contractsincludes billed amounts earned
on construction contracts open at the date of the balance sheet. Costs and
estimated earnings in excess of billings on construction contracts represent
amounts earned, but not billed to customers at the balance sheet date.

Property and Equipmentis recorded at cost and is evaluated for impairment as
described below. Depreciation is computed primarily on the straight-line method
over the estimated useful lives of the related assets, generally forty years
for buildings and improvements and seven years for furniture, fixtures and
equipment. Significant improvements are capitalized while maintenance and
repairs are expensed as incurred. The Company capitalizes direct and indirect
costs of construction and interest during the construction period. Interest
costs capitalized during the years ended December 31, 2000, December 30, 2001
and December 29, 2002 were approximately $349,000, $858,000 and $80,000,
respectively. Pre-opening costs are expensed as incurred. The Company
recognized approximately $568,000 of impairment losses on a hotel owned and
operated by the Company at December 29, 2002.

Land Under Development or Held For Saleconsists of land adjacent to hotels
developed by the Company, land adjoining the Companys corporate headquarters
and other commercial tracts which are being developed for sale or are held for
sale. Such amounts are recorded at cost and are evaluated for impairment as
described below. The Company recognized approximately $76,000 of impairment
losses on land under development or held for sale parcels in 2002. There were
no impairment losses on land under development or held for sale in 2001 or
2000. The Company capitalizes direct costs related to specific future projects
(pre-development costs) when they are deemed probable. Such amounts are
expensed to operations when the related project is no longer considered
probable. The Company expensed approximately $0, $0, and $1,864,000 of
pre-development costs in 2000, 2001 and 2002, respectively.

Deferred Chargesrepresent loan costs incurred in obtaining financing and are
amortized using the interest method over the respective terms of the related
debt. Accumulated amortization totaled approximately $2,651,000 and $2,637,000
as of December 30, 2001 and December 29, 2002, respectively.

Investments.The Companys investment securities were classified as
available-for-sale

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and were included in other assets in the accompanying
balance sheets. Available-for-sale securities were carried at fair value with unrealized holding gains and losses,
net of tax effects, reported as a separate component of shareholders equity.
The Company disposed of its investment in these securities in 2002 and,
accordingly, recognized a gain of approximately $315,000.

Goodwillincludes excess of cost over fair value of net assets acquired in the
amount of approximately $2,387,000 and $766,000 at December 30, 2001 and
December 29, 2002, respectively. The amount reported is net of accumulated
amortization of approximately $1,362,000 as of December 30, 2001.

Trademark and Franchise Rightsinclude costs of the Sumner Suites trademark of
approximately $389,000 as of December 30, 2001, which was amortized on a
straight-line basis over a period of twenty years until written off as
worthless in 2002. This amount is net of accumulated amortization of $104,000
as of December 30, 2001. In addition, trademarks and franchise rights included
cost incurred in amending the Companys franchise license agreement, which was
being amortized on the straight-line method over twenty years, and was written
off as worthless in the second quarter of 2002. As of December 30, 2001,
franchise costs of Baymont Inn & Suites was $19,815 net of accumulated
amortization of $185. The franchise was acquired in November of 2001 and was
being amortized on a straight-line basis over a period of five years until the
one Baymont hotel was sold in 2002. Also included in trademark and franchise
rights is GuestHouse International Franchise Systems, Inc., franchise rights
acquired on May 3, 2002, for $750,000. These franchise rights are being
amortized on a straight-line basis over a period of three years. As of
December 29, 2002, the franchise rights on GuestHouse were approximately
$583,000 net of accumulated amortization of approximately $167,000. At
December 29, 2002, trademark and franchise costs also include costs in the
amount of approximately $120,000 incurred on June 3, 2002 in the acquisition of
USInns license rights. The life of these rights are indefinite. All franchise
rights are included in the franchising, reservation, and management segment.

Other Assetsinclude cash surrender value of life insurance, non-current
portion of direct financing leases, and base linens stock.

Impairment.The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows related to those assets are less than their carrying amounts. The
Company records impairment losses on long-lived assets under development or
held for sale when indicators of impairment are present and the estimated fair
value less costs to sell is less than their carrying amount. Subsequent to the
date that an asset is held for sale,

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depreciation expense is not recorded.

Advertising.The Company charges the costs of advertising to expense as
incurred. Advertising expense was approximately $1,117,000, $486,000 and
$520,000 for the years ended December 31, 2000, December 30, 2001 and December
29, 2002, respectively.

Income Taxes.The Company uses the liability method to account for income
taxes.

Hotel Revenuesare recognized as services are rendered.

Construction and Development Revenuesfrom fixed-price and cost-plus
construction contracts are recognized based on the percentage of completion
method, measured by the percentage of cost incurred to total estimated cost for
each contract. This method is used because management considers costs incurred
to be the best available measure of progress on these contracts. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions and
estimated profitability (including those arising from contract penalty
provisions) and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
No material amounts were recognized due to revisions in 2000, 2001 or 2002.

Claims are amounts in excess of the agreed contract price that a contractor
seeks to collect from customers or others for customer-caused delays, errors in
specifications and designs, contract terminations, change orders in dispute or
unapproved as to both scope and price, or other causes of unanticipated
additional costs. An amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the amount can be
reliably estimated. Those two requirements are satisfied by managements
determination of the existence of all of the following conditions: the contract
or other evidence provides a legal basis for the claim; additional costs are
caused by circumstances that were unforeseen at the contract date and are not
the result of deficiencies in the contractors performance; costs associated
with the claim are identifiable or otherwise determinable and are reasonable in
view of the work performed; and the evidence supporting the claim is
objective and verifiable. If such requirements are met, revenue from a claim
is recorded to the extent that contract costs relating to the claim have been
incurred. Costs attributable to claims are treated as costs of contract
performance as incurred. No material amounts were recognized due to claims in
2000, 2001, or 2002.

Franchising, Reservation and Management Revenuesare recognized as earned.

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Gains from the Sale or Transfer of Land and Hotel Propertiesis recognized at
the time the sale or transfer is consummated, the minimum down payment is
received, and there is no significant continuing involvement. Losses on the
sale or transfer of land and hotel properties are recognized at the time the
sale or transfer occurs to the extent that such
losses have not already been recognized through impairment or otherwise.

Earnings Per Common Sharefor all periods has been computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. Basic earnings per share is computed by dividing earnings by the
weighted average number of common shares outstanding during the year. Diluted
earnings per common
share is computed by dividing earnings by the weighted average number of common
shares outstanding during the year plus incremental shares that would have been
outstanding upon the assumed exercise of dilutive options and the assumed
conversion of dilutive debentures. See Note 5 for a reconciliation of basic and
diluted earnings per share.

Stock-Based Compensation.The Company uses the intrinsic value method for
valuing its awards of stock options and recording the related compensation
expense, if any. This compensation expense is included in general and
administrative expense.

The Company has adopted the disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensationand SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure.The following table presents a summary
of the pro forma effects to reported net earnings (loss) as if the Company had
elected to recognize compensation costs based on the fair value of the options
granted as prescribed by SFAS No. 123.

|                                                                                                                                            |  |              |             |              |  |              |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | ------------ |  | ------------ | ------- | - |  | - | -------- | -
|                                                                                                                                            |  |              |             |              |  | Year ended   |         |   |  |  
|                                                                                                                                            |  | December 29, |             | December 30, |  | December 31,
|                                                                                                                                            |  | 2002         |             | 2001         |  | 2000        
|                                                                                                                                            |  |              |             |              |  |             
|Net (loss) earnings                                                                                                                         |  | $            | (28,247,564 | )            |  | $            | 911,545 |   |  | $ | 577,662  |  
|Less: total stock-based employee
compensation expense determined under
fair value based method for all awards
granted since January 1, 1995 |  |              | (18,732     | )            |  |              | (95,685 | ) |  |   | (559,057 | )
|                                                                                                                                            |  |              |             |              |  |              |         |   |  |   |          |  
|Pro forma net (loss) earnings                                                                                                               |  | $            | (28,266,296 | )            |  | $            | 815,860 |   |  | $ | (18,605  | )
|                                                                                                                                            |  |              |             |              |  |              |         |   |  |   |          |  
|Pro forma (loss) earnings per share-basic                                                                                                   |  | $            | (5.53       | )            |  | $            | .15     |   |  | $ | .00      |  
|Pro forma (loss) earnings per share-diluted                                                                                                 |  |              | (5.53       | )            |  |              | .15     |   |  |   | .00      |  

There were no grants of stock-based compensation in 2000, 2001 or 2002.

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The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options and shares that have no vesting restrictions
and are fully transferable. In addition, valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Companys stock options have characteristics significantly
different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.

Concentrations of Credit Risk.Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
investments, trade receivables, construction contracts receivable, and notes
receivable. The Company places its cash investments with high credit quality
financial institutions who are members of the FDIC thus reducing any potential
risk. Concentrations of credit risk with respect to trade receivables are
limited due to the Companys large number of customers and their dispersion
across many geographic areas. Concentrations of credit risk with respect to
construction contracts receivable and notes receivable are increased due to the
smaller number of contracts and notes and their higher dollar amounts. The
Company performs credit evaluations of its customers and generally does not
require collateral or other security to support customer receivables. As of
December 30, 2001, and December 29, 2002, approximately $58,799,000 and
$58,762,000, respectively, of notes receivable are from a group of companies
affiliated with one another, which acquired and operate 16 of the hotels
described in Note 13. Although notes receivable generally consist of first
mortgage notes that are cross-collateralized and cross-defaulted, in the event
the fair values of the underlying assets were to be less than balances of the
first mortgage notes, the notes receivable could be under-collateralized; as
of December 29, 2002, these notes receivable totaling approximately $58,762,000
were written down to approximately $40,564,000 based upon the estimated fair
values of the underlying properties and the Companys anticipation of taking
ownership of the properties by deeds in lieu of foreclosure due to the notes
maturity in July of 2003 and the owners indicated inability to pay the notes
at maturity.

Reclassifications.Certain reclassifications have been made in the 2000 and
2001 consolidated financial statements to conform to the classifications used
in 2002. These classifications had no impact on net income as previously
reported.

Recently Issued Accounting Pronouncements.In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 was
effective July 1, 2001,

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and SFAS No. 142 was effective January 1, 2002. Under
the new rules in SFAS No. 142, goodwill and indefinite lived intangible assets
are no longer amortized effective January 1, 2002, but are subject to annual
impairment tests. Other intangible assets continue to be amortized over their
useful lives.

The Company has applied the new rules on accounting for goodwill and intangible
assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of
SFAS No. 142 resulted in an increase in net income of approximately $261,000
($0.05 per share) per year. A reconciliation of previously reported net income
to the pro forma amounts adjusted for the exclusion of goodwill and indefinite
lived intangible assets amortization, net of income tax effect, follows:

|                                                                   |  |              |             |              |  |              |           |  |  |   |         | 
|------------------------------------------------------------------ |  | ------------ | ----------- | ------------ |  | ------------ | --------- |  |  | - | ------- | 
|                                                                   |  |              |             |              |  | Year ended   |           |  |  |  
|                                                                   |  | December 29, |             | December 30, |  | December 31,
|                                                                   |  | 2002         |             | 2001         |  | 2000        
|                                                                   |  |              |             |              |  |             
|Reported net (loss) earnings                                       |  | $            | (28,247,564 | )            |  | $            | 911,545   |  |  | $ | 577,662 | 
|Add: Goodwill and indefinite lived assets
amortization, net of tax |  |              |            |              |  |              | 260,840   |  |  |   | 260,840 | 
|                                                                   |  |              |             |              |  |              |           |  |  |   |         | 
|Pro forma adjusted net (loss) earnings                             |  | $            | (28,247,564 | )            |  | $            | 1,172,385 |  |  | $ | 838,502 | 
|                                                                   |  |              |             |              |  |              |           |  |  |   |         | 
|Pro forma adjusted earnings per share basic                        |  | $            | (5.52       | )            |  | $            | 0.21      |  |  | $ | 0.15    | 
|Pro forma adjusted earnings per share diluted                      |  | $            | (5.52       | )            |  | $            | 0.21      |  |  | $ | 0.15    | 

The Company sold its interests in 27 Sumner Suites hotels in 2000 to Prime
Hospitality Corp., who subsequently converted all of them to their AmeriSuites
hotel brand. The Company continued to hold the Sumner Suites trademark with
the possibility of using it to brand future hotels it might develop or acquire.
In the second quarter of 2002, management made the decision to abandon the
trademark since the use of the name by the Company in the future is highly
unlikely. Consequently, the remaining balance of $376,000 for the Sumner
Suites trademark, which was included in the franchising, reservation and
management segment, was written off in the second quarter.

The Company carried intangible assets (deferred charges of $4.0 million and
goodwill of $2.4 million) related to the acquisition and modification of the
franchising rights for Shoneys Inns and Shoneys Inns & Suites at $6.4
million, which was included in the franchising, reservation and management
segment. The Company has been unsuccessful in its efforts to sell new
franchises for at least a year, and existing franchises have exited the
Shoneys Inn system for several years. In the second quarter of 2002, the
Company acquired the exclusive franchising rights for the GuestHouse
International Inns & Suites brand. The Company has decided to convert all
existing Shoneys Inns to the GuestHouse brand and to franchise only the
GuestHouse brand in the future. No more attempts will be made to franchise the
Shoneys Inn brand. As a result, the value of the

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Shoneys Inn franchising
rights has been determined to be worthless. Consequently, the balance of $6.4
million was written off in the second quarter.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supercedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and the accounting and reporting provisions of APB No. 30, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events
and Transactions. SFAS No. 144 removes goodwill from its scope and clarifies
other implementation issues related to SFAS No. 121. SFAS No. 144 also
provides a single framework for evaluating long-lived assets to be disposed of
by sale. The provisions of this Statement were adopted at the beginning of
fiscal 2002.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Since the issuance of
Statement 4, the use of debt extinguishment has become part of the risk
management strategy of many companies, including the Company. These debt
extinguishments will not be classified as extraordinary after the adoption of
SFAS No. 145. Adoption of SFAS No. 145 is required for fiscal years beginning
after May 15, 2002, but earlier application is encouraged. The Company elected
to adopt the provisions of SFAS No. 145 at the beginning of fiscal 2002. The
gains on extinguishment of debt for all periods presented, previously
classified as an extraordinary item in prior periods, have been reclassified to
conform with the provisions of Statement 145.

SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, issued in December 2002, which amends SFAS No. 123, Accounting for
Stock-Based Compensation, provides an alternative method of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The transition provisions of
SFAS No. 148 are effective for financial reports containing financial
statements for years ending after December 15, 2002, while certain additional
disclosure requirements of SFAS No.148 are effective for interim periods
beginning after December 15, 2002. The Company has elected to account for its
stock-based compensation plans under the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and does not utilize the fair value method.
However, the Company has

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adopted the disclosure requirements of SFAS No. 123
and has adopted the additional disclosure requirements as specified in SFAS No.
148 in fiscal 2002.

SFAS No. 143, Accounting for Asset Retirement Obligations, issued in June 2001,
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and for the associated retirement
costs. SFAS No. 143, which applies to all entities that have a legal
obligation associated with the retirement of tangible long-lived assets, is
effective for fiscal years beginning after June 15, 2002. The adoption of SFAS
No. 143 is not expected to have a material impact on the Companys financial
position or results of operations.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
issued in June 2002, requires that a liability for the cost associated with an
exit or disposal activity be recognized when the liability is incurred. SFAS
No. 146 also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this Statement are effective
for exit or disposal activities that are initiated after December 31, 2002.
The Company expects that the adoption of SFAS No. 146 during 2003 will not
materially impact the Companys financial position and results of operations.

2. Property and Equipment

Property and equipment consists of:

|                                               |  |              |             |              |  |   |             |  
|---------------------------------------------- |  | ------------ | ----------- | ------------ |  | - | ----------- | -
|                                               |  | December 29, |             | December 30,
|                                               |  | 2002         |             | 2001        
|                                               |  |              |             |             
|Land and improvements                          |  | $            | 10,364,197  |              |  | $ | 16,187,365  |  
|Buildings and improvements                     |  |              | 50,531,502  |              |  |   | 52,021,759  |  
|Furniture, fixtures, equipment and software    |  |              | 20,987,023  |              |  |   | 22,564,043  |  
|Construction in progress                       |  |              |            |              |  |   | 7,846,670   |  
|                                               |  |              |             |              |  |   |             |  
|                                               |  |              | 81,882,722  |              |  |   | 98,619,837  |  
|Less accumulated depreciation and
amortization |  |              | (16,297,988 | )            |  |   | (15,522,304 | )
|                                               |  |              |             |              |  |   |             |  
|                                               |  | $            | 65,584,734  |              |  | $ | 83,097,533  |  
|                                               |  |              |             |              |  |   |             |  

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3. Long-Term Debt

Long-term debt consists of:

|                                                                                                        |  |                   |             |                   |  |   |            |  
|------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | ----------------- |  | - | ---------- | -
|                                                                                                        |  | December 29, 2002 |             | December 30, 2001
|                                                                                                        |  |                   |             |                  
|Industrial revenue bonds, due in varying
amounts through 2017                                           |  | $                 | 2,820,000   |                   |  | $ | 2,905,000  |  
|7.50% Convertible subordinated debentures                                                               |  |                   | 16,520,000  |                   |  |   | 25,596,000 |  
|9.75% Series A senior subordinated notes                                                                |  |                   | 23,657,419  |                   |  |   | 20,167,000 |  
|9.55% Series B senior subordinated notes                                                                |  |                   | 19,064,942  |                   |  |   | 20,341,000 |  
|Bank credit facilities                                                                                  |  |                   | 22,156,276  |                   |  |   | 13,000,000 |  
|Notes payable  bank and other, bearing
interest at 2.01% to 8.19%, due in
varying amounts through 2010 |  |                   | 7,711,150   |                   |  |   | 8,343,081  |  
|                                                                                                        |  |                   |             |                   |  |   |            |  
|                                                                                                        |  |                   | 91,929,787  |                   |  |   | 90,352,081 |  
|Less current portion                                                                                    |  |                   | (67,548,511 | )                 |  |   | (4,058,700 | )
|                                                                                                        |  |                   |             |                   |  |   |            |  
|                                                                                                        |  | $                 | 24,381,276  |                   |  | $ | 86,293,381 |  
|                                                                                                        |  |                   |             |                   |  |   |            |  

The Industrial Revenue Bonds (IRBs) and substantially all notes payable are
collateralized by property and equipment with a net book value of approximately
$15.2 million at December 29, 2002. Additionally, the IRBs, are collateralized
by irrevocable letters of credit and are guaranteed by the Company. The
interest rate on the IRBs is a variable rate reset weekly by the remarketing
agent (1.97% at December 29, 2002).

The Companys 7.50% convertible subordinated debentures mature in May 2004 with
interest payable in semi-annual installments. The debentures are convertible
at any time before maturity, unless previously redeemed, into common stock of
the Company at a conversion price of $23.31 per share, subject to adjustment.
The debentures are unsecured and subordinated in right of payment to the prior
payment in full of all existing and future senior indebtedness, as defined in
the debentures. The Company, at its option, can redeem the bonds beginning in
May 1997 at 105.25% of par, declining .75% each year thereafter to par in May
2004.

During November 1996, the Company issued $33,150,000 of 9.75% senior
subordinated notes, Series A, under an aggregate $125,000,000 senior
subordinated indenture agreement. The notes mature in November 2006, with
interest payable quarterly. The notes are unsecured and subordinated in right
of payment to the prior payment in full of all existing and future senior
indebtedness of the Company. Additionally, in September 1997, the Company
issued $35,000,000 of 9.55% senior subordinated notes, Series B, also under the
aggregate $125,000,000 senior subordinated indenture agreement. The notes
mature in September 2007, with interest payable quarterly. The

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notes are
unsecured and subordinated in right of payment to the prior payment in full of
all other senior indebtedness of the Company and will be senior in right of
payment to, or pari passu with
all other subordinated indebtedness of the Company, including the Series A
notes. Both Series A and Series B of the senior subordinated notes are subject
to annual redemptions at the option of the holder of the notes in the amount of
5% of the original aggregate amount issued under the indenture, which is
$3,407,500 per year beginning December 1, 1999. The note holders exercised
this option in each of the last three years and are expected to do so again in
fiscal 2003. Accordingly, the annual redemption amount has been included in
current portion of long-term debt in these financial statements.

The Company established a three-year credit facility with a financial
institution effective August 27, 1999. An amendment to the credit facility
became effective October 3, 2001, which, among other changes, extended the
maturity to September 30, 2004. A second amendment to the credit facility
became effective November 26, 2002, which, among other changes, added real
property collateral for the purpose of increasing the borrowing base. The
credit facility is for $30 million (a $10 million term loan and a $20 million
revolving line of credit), secured by a pledge of certain promissory notes
payable to the Company received in connection with the sale of 16 of the
Companys lodging facilities in the third quarter of 1998 (Note 14) and the
real property collateral (one hotel) added in 2002 by the second amendment. The
borrowing base is the lower of (a) 85% of the outstanding principal amount of
the pledged notes, (b) 65% of the appraised market value of the underlying real
property collateral securing the pledged notes, and of the real property
collateral (c) a multiple of the trailing twelve months net operating income
of the real property collateral and the underlying properties securing the
pledged notes serving as collateral, or (d) $30 million. Effective October 3,
2001, the interest rate on the term loan is at the lenders base rate plus 100
basis points, and the interest rate on the revolving line of credit is at the
lenders base rate plus 250 basis points, with a floor of 7.00% on both
portions of the facility. The Company is to pay commitment fees on the unused
portion of the facility at .50% per annum. The credit facility also contains
covenants which limit or prohibit the incurring of certain additional
indebtedness in excess of a specified debt to total capital ratio, prohibit
additional liens on the collateral, restrict mergers and the payment of
dividends and restrict the Companys ability to place liens on unencumbered
assets. The credit facility contains financial covenants as to the Companys
minimum net worth. As of December 29, 2002, the Company had $21.7

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million in
borrowings outstanding under this credit facility, consisting of the $10
million term loan and $11.7 million on the revolving line of credit. The
balances of notes receivable collateralizing this credit facility totaled
approximately $40,616,000 as of December 29, 2002.

The Company also maintains a $1.0 million unsecured line of credit with another
bank, bearing interest at the lenders prime rate, maturing May 31, 2003. As
of December 29, 2002, the Company had $500,000 outstanding under this credit
facility.

In May 2000, the Company repaid approximately $7,458,000 of debt with a portion
of the proceeds of the sale of four hotels (Note 12). In July 2000, the Company
repaid approximately $1,638,000 of debt with the proceeds of the sale of its
leasehold interests in 24 hotels (Note 12).

In the years ended December 31, 2000, December 30, 2001, and December 29, 2002,
the Company repurchased $29,784,000, $3,412,000, and $1,590,000, respectively,
of the Companys previously issued subordinated debt at a discount from face
value. These repurchases resulted in pretax gains, net of the write-off of
related unamortized deferred financing costs of $7,307,000, $913,000, and
$375,000 in 2000, 2001, and 2002, respectively. Additionally in 2002, the
Company, in a negotiated transaction, exchanged $8,233,000 face value of its
senior subordinated notes previously purchased for $5,269,000, for $7,486,000
of its outstanding 7.50% subordinated debentures, resulting in a net pretax
gain of $2,217,000.

Maturities of long-term debt are as follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2003       |  | $ | 67,548,511 | 
|2004       |  |   | 21,761,276 | 
|2005       |  |   | 115,000    | 
|2006       |  |   | 125,000    | 
|2007       |  |   | 137,500    | 
|Thereafter |  |   | 2,242,500  | 
|           |  |   |            | 
|           |  | $ | 91,929,787 | 
|           |  |   |            | 

The three-year credit facility contains financial covenants requiring a minimum
consolidated net worth, as defined, of $65,000,000. At December 29, 2002, the
Company was not incompliance with these covenants. Subsequent to year-end, the
Company obtained an amendment to the credit facility reducing the required
minimum consolidated net worth retroactive to December 29, 2002, and waiving,
through the remainder of fiscal

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2003, the facilitys cross-default provisions.
Accordingly, the three-year credit facility has been classified as a noncurrent
liability in the 2002 consolidated balance sheet.

The trust indenture applicable to the Series A and Series B senior subordinated
notes contains a financial covenant requiring a minimum consolidated net worth
of $75,000,000. As of December 29, 2002, the Companys consolidated net worth
was less than the required amount. This covenant violation, as specified in
the indenture, allows the holders of a minimum of 25% of the outstanding
principal amount of the notes outstanding to declare a default. In the event
that a default is declared, the Company, upon receipt of written notice by
certified mail from the trustee, has 60 days from receipt of notice to cure
the default. A minimum of 51% of the outstanding principal amount of the notes
outstanding may waive any default declared by the 25% or more holders.

The Company is in the process of completing an Exchange Offer and Consent
Solicitation (Exchange Offer), which is expected to be completed within the
60 day cure period. The terms of the Exchange Offer contain a modification of
the financial covenants reducing the minimum consolidated net worth, which is
expected to cure the default, if declared, without any further action. However
there can be no assurance that the Exchange Offer will be completed. Because
of the covenant violation at December 29, 2002, the Company has classified all
of the Series A and Series B senior subordinated notes as a current liability.
Additionally, due to cross-default provisions in the Companys convertible
subordinated debentures and a loan secured by the Companys aircraft, these
debt instruments have also been classified as current liabilities as of
December 29, 2002.

The total amount of debt classified as current liabilities due to the
circumstances discussed above was $67.5 million as of December 29, 2002. As of
April 4, 2003, the Company had reduced that amount by $2.2 million, including
$838,000 of the senior subordinated notes. The Company currently maintains
approximately $11.0 million in cash and is currently expecting to collect cash
proceeds of approximately $40.0 million within the next 60 days from the
collection of two notes receivable, the sale of properties serving as
collateral under ten notes receivable, and the sale of three unencumbered
properties. Negotiations are currently in progress relative to the sale of an
additional 12 hotels, five of which collateralize notes receivable, with net
proceeds of $53 million expected. Additionally, the Company anticipates
refunds of approximately $8.5 million of previously paid income taxes by
mid-2003, and at least three parcels of undeveloped land are expected to be
sold in 2003 for approximately $5.6 million. The Company expects to cure any
default declared by the senior subordinated note holders within the 60 day cure
period, but if not, is confident that it will have sufficient cash available
from the above-listed sources and cash from other sources to pay its debt in
full in 2003.

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The Company is evaluating various alternatives to maximize shareholder value.
These alternatives could include, without limitation, the franchising and
operation of additional GuestHouse Inns & Suites, a sale of the remaining
Company-owned hotels, negotiating new credit arrangements, developing hotels
for other owners, the repurchase of additional shares of the Companys common
stock or outstanding debt securities, or any combination of these or other
strategies, including, as announced on January 16, 2003, the possible spin-off
of its reservation services subsidiary (InnLink) to the Companys shareholders.
The Exchange Offer, if consummated, will allow the Company more flexibility in
purchasing its outstanding debt and common stock. The Company believes that a
combination of existing cash, the liquidation of notes receivable, the sale of
hotel properties and leasehold rights, net cash provided by operations, and
borrowings under
existing credit facilities or mortgage debt, will be sufficient to fund its
capital expenditures, stock repurchase plan, debt repayments and operations for
at least the next twelve months.

4. Commitments and Contingencies

The Company and its subsidiaries lease certain property and equipment under
non-cancelable operating lease agreements. Total rental expense under
operating leases for the years ended December 31, 2000, December 30, 2001 and
December 29, 2002 was approximately $12,987,000, $582,000 and $584,000,
respectively.

Future minimum rental payments are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 350,000 | 
|2004       |  |   | 350,000 | 
|2005       |  |   | 291,667 | 
|Thereafter |  |   |        | 
|           |  |   |         | 
|           |  | $ | 991,667 | 
|           |  |   |         | 

The Company is self-insured for workers compensation benefits up to $500,000
annually in the aggregate and $250,000 per occurrence and has recorded an
accrual for all expected and outstanding claims at December 29, 2002. While
the Companys ultimate liability may exceed or be less than the amount accrued,
the Company believes that it is unlikely that it would experience losses that
would be materially in excess of such estimated amounts. In addition to the
recorded accruals, the Company had outstanding letters of credit in the amount
of $125,000 and $512,000 as of December 30, 2001 and December 29, 2002,
respectively, to satisfy workers compensation self-insurance security deposit
requirements.

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The Company is or has been a party to legal proceedings incidental to its
business. In the opinion of management, any ultimate liability with respect to
these actions will not materially affect the consolidated financial position or
results of operations of the Company.

The construction of a hotel was completed for a third party during 2001, and a
balance of approximately $2,000,000 remained uncollected as of December 29,
2002. The Company had a lien against the property and filed an arbitration
claim against the owner. The Company received an arbitration award of
substantially all its claim in the fourth quarter of 2002 to be paid within 30
days of the October 30, 2002 award date. The owner of the hotel failed to pay
the award when due, and on January 3, 2003 filed Chapter 11 bankruptcy. As a
result, the Company has charged the entire balance off in the fourth quarter.
Another contract receivable is for approximately $1,000,000, and arbitration
proceedings were initiated on January 15, 2003. The owner of the hotel claims
damages in excess of the amount owed. Consequently, the Company has charged
the entire amount off in its fourth quarter of 2002. Any recovery from these
contracts will be recorded as earned when received. Approximately $600,000 of
other construction contracts receivable was also charged off as uncollectible
in the fourth quarter of 2002. Charge-offs of construction contracts
receivable then totaled $3.6 million.

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5. Earnings (Loss) Per Share

The following table reconciles earnings and weighted average shares used in the
earnings (loss) per share (EPS) calculations for fiscal years 2002, 2001 and
2000.

|                                                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |        | 
|------------------------------------------------------------------------------------ | ------- | - | ----------------- | - | ----------------- | - | ----------------- | ------ |  | - | --------- | ------ | 
|                                                                                     |         |   | Year ended       
|                                                                                     |         |   |                  
|                                                                                     |         |   | December 29, 2002 |   | December 30, 2001 |   | December 31, 2000
|                                                                                     |         |   |                   |   |                   |   |                  
|Numerator:                                                                           |         |   |                   |   |                   |   |                   |        |  |   |           |       
|(Loss) earnings from continuing operations                                           |         | $ | (24,677,356       | ) |                   | $ | 1,388,849         |        |  | $ | 978,057   |       
|(Loss) earnings from discontinued operations                                         |         |   | (3,570,208        | ) |                   |   | (477,304          | )      |  |   | (400,395  | )     
|                                                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |       
|Net (loss) earnings                                                                  |         | $ | (28,247,564       | ) |                   | $ | 911,545           |        |  | $ | 577,662   |       
|                                                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |       
|Denominator:                                                                         |         |   |                   |   |                   |   |                   |        |  |   |           |       
|Denominator for basic (loss) earnings per
share   weighted-average shares           |         |   | 5,113,953         |   |                   |   | 5,464,533         |        |  |   | 5,471,962 |       
|Effect of dilutive securities:                                                       |         |   |                   |   |                   |   |                   |        |  |   |           |       
|                                                                                     | Options |   |                   |  |                   |   |                   | 65,292 |  |   |           | 81,890 | 
|                                                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |       
|Denominator for diluted (loss) earnings per
share  adjusted weighted-average shares |         |   | 5,113,953         |   |                   |   | 5,529,825         |        |  |   | 5,553,852 |       
|                                                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |       
|Basic (loss) earnings per share:                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |       
|(Loss) earnings from continuing operations                                           |         | $ | (4.83             | ) |                   | $ | 0.25              |        |  | $ | 0.18      |       
|(Loss) earnings from discontinued operations                                         |         |   | (0.69             | ) |                   |   | (0.09             | )      |  |   | (0.07     | )     
|                                                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |       
|Net (loss) earnings                                                                  |         | $ | (5.52             | ) |                   | $ | 0.16              |        |  | $ | 0.11      |       
|                                                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |       
|Diluted (loss) earnings per share:                                                   |         |   |                   |   |                   |   |                   |        |  |   |           |       
|(Loss) earnings from continuing operations                                           |         | $ | (4.83             | ) |                   | $ | 0.25              |        |  | $ | 0.18      |       
|(Loss) earnings from discontinued operations                                         |         |   | (0.69             | ) |                   |   | (0.09             | )      |  |   | (0.08     | )     
|                                                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |       
|Net (loss) earnings                                                                  |         | $ | (5.52             | ) |                   | $ | 0.16              |        |  | $ | 0.10      |       
|                                                                                     |         |   |                   |   |                   |   |                   |        |  |   |           |       

The Companys 7.5% debentures were convertible into 1,244,444, 1,098,069, and
708,709 shares of common stock at December 31, 2000, December 30, 2001 and
December 29, 2002, respectively, but were not included in the computation of
diluted EPS, as such securities were anti-dilutive.

6. Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, and
borrowings under lines of credit approximates fair values due to the short-term
maturities of these instruments. The carrying value of notes receivable
approximates fair value due to the write-down to net realizable value at
December 29, 2002 (see Note 14), and the annual adjustment to market interest
rates. Notes payable carrying value approximates fair value due to (1) a
recent borrowing and (2) variable rates on earlier borrowings. The carrying

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value of industrial revenue bonds approximates fair value due to the variable
interest rate of these instruments. The convertible subordinated debentures and
senior subordinated notes have the following estimated fair values based upon
quoted market prices as of December 29, 2002 and December 30, 2001:

|                                    |  |            |            |                |  |            |            |                |  |   |            |  |  |   |            | 
|----------------------------------- |  | ---------- | ---------- | -------------- |  | ---------- | ---------- | -------------- |  | - | ---------- |  |  | - | ---------- | 
|                                    |  | 2002       |            | 2001          
|                                    |  |            |            |               
|                                    |  | Fair Value |            | Carrying Value |  | Fair Value |            | Carrying Value
|                                    |  |            |            |                |  |            |            |               
|Convertible subordinated
debentures |  | $          | 11,440,100 |                |  | $          | 16,520,000 |                |  | $ | 16,253,460 |  |  | $ | 25,596,000 | 
|Senior subordinated
notes           |  |            | 29,466,450 |                |  |            | 42,722,361 |                |  |   | 25,719,970 |  |  |   | 40,508,000 | 
|                                    |  |            |            |                |  |            |            |                |  |   |            |  |  |   |            | 
|                                    |  | $          | 40,906,550 |                |  | $          | 59,242,361 |                |  | $ | 41,973,430 |  |  | $ | 66,104,000 | 
|                                    |  |            |            |                |  |            |            |                |  |   |            |  |  |   |            | 

As of December 30, 2001, the aggregate fair value of securities
available-for-sale was $279,506. These securities were sold in 2002.

7. Stock Option Plan

The Companys 1991 Stock Option Plan, as amended, (the Plan), authorizes the
grant to key employees of options to purchase up to an aggregate of 900,000
shares of common stock. The exercise price of options granted under the terms
of the Plan must not be less than 100% of the fair market value of the shares
as of the date of grant, or 110% of the fair market value for incentive stock
options granted to option holders possessing more than 10% of the total
combined voting power of all classes of stock of the Company. Under the Plan,
the options are exercisable at various periods from one to five years after the
date of grant and expire ten years after the date of grant. The Plan has now
expired, and no more options will be granted under this Plan.

A summary of the status of the Plan for the years ended December 31, 2000,
December 30, 2001 and December 29, 2002, follows:

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|                        |           |  |                          |       |             |  |                |          |                  |   |      |      | 
|----------------------- | --------- |  | ------------------------ | ----- | ----------- |  | -------------- | -------- | ---------------- | - | ---- | ---- | 
|                        |           |  | Shares Subject to Option |       |             |  |               
|                        |           |  |                          |       |             |  |               
|                        |           |  | Available for            |       |             |  |                |          | Weighted Average
|                        |           |  | Grant                    |       | Outstanding |  | Exercise Price
|                        |           |  |                          |       |             |  |               
|December 26, 1999       |           |  | 146,744                  |       |             |  | 695,335        |          |                  | $ | 3.76 |     
|                        | Granted   |  |                          |      |             |  |                |         |                  |   |      |     | 
|                        | Exercised |  |                          |      |             |  |                | (409,400 | )                |   |      | 3.75 | 
|                        | Canceled  |  |                          | 2,901 |             |  |                | (2,901   | )                |   |      | 3.75 | 
|                        |           |  |                          |       |             |  |                |          |                  |   |      |     
|December 31, 2000       |           |  | 149,645                  |       |             |  | 283,034        |          |                  |   | 3.78 |     
|                        | Granted   |  |                          |      |             |  |                |         |                  |   |      |     | 
|                        | Exercised |  |                          |      |             |  |                | (1,067   | )                |   |      | 3.75 | 
|                        | Canceled  |  |                          |      |             |  |                |         |                  |   |      |     | 
|Plan expired for grants |           |  | (149,645                 | )     |             |  |               |          |                  |   |     |     
|                        |           |  |                          |       |             |  |                |          |                  |   |      |     
|December 30, 2001       |           |  |                         |       |             |  | 281,967        |          |                  |   | 3.78 |     
|                        | Granted   |  |                          |      |             |  |                |         |                  |   |      |     | 
|                        | Exercised |  |                          |      |             |  |                | (55,500  | )                |   |      | 3.75 | 
|                        | Canceled  |  |                          |      |             |  |                | (5,000   | )                |   |      | 5.50 | 
|                        |           |  |                          |       |             |  |                |          |                  |   |      |     
|December 29, 2002       |           |  |                         |       |             |  | 221,467        |          |                  |   | 3.75 |     
|                        |           |  |                          |       |             |  |                |          |                  |   |      |     

The following table summarizes information relating to the stock options
outstanding as of December 29, 2002:

|                    |      |                     |             |             |           |          |           |              |             |          |           |      |  |  |         |        |  |  |   |      | 
|------------------- | ---- | ------------------- | ----------- | ----------- | --------- | -------- | --------- | ------------ | ----------- | -------- | --------- | ---- |  |  | ------- | ------ |  |  | - | ---- | 
|Options Outstanding |      | Options Exercisable
|                    |      |                    
|                    |      |                     | Number      |             | Weighted- |          |           |              |             |          | Number    |      |  |  |        
|                    |      |                     | Outstanding |             | Average   |          | Weighted- |              | Exercisable |          | Weighted-
|                    |      |                     | at          |             | Remaining |          | Average   |              | at          |          | Average  
|Exercise            |      | December 29,        |             | Contractual |           | Exercise |           | December 29, |             | Exercise
|Price               |      | 2002                |             | Life        |           | Price    |           | 2002         |             | Price   
|                    |      |                     |             |             |           |          |           |              |             |         
|$                   | 3.75 |                     |             | 29,467      |           |          |           | 0.93         |             |          | $         | 3.75 |  |  |         | 29,467 |  |  | $ | 3.75 | 
|                    | 3.75 |                     |             | 41,000      |           |          |           | 2.33         |             |          |           | 3.75 |  |  |         | 41,000 |  |  |   | 3.75 | 
|                    | 3.75 |                     |             | 68,000      |           |          |           | 3.59         |             |          |           | 3.75 |  |  |         | 68,000 |  |  |   | 3.75 | 
|                    | 3.75 |                     |             | 83,000      |           |          |           | 4.42         |             |          |           | 3.75 |  |  |         | 83,000 |  |  |   | 3.75 | 
|                    |      |                     |             |             |           |          |           |              |             |          |           |      |  |  |         |        |  |  |   |     
|                    |      |                     | 221,467     |             |           |          |           |              |             |          |           |      |  |  | 221,467 |        |  |  |   |     
|                    |      |                     |             |             |           |          |           |              |             |          |           |      |  |  |         |        |  |  |   |     

8. Shareholders Equity

In 2001 and prior years, the Companys Board of Directors authorized the
repurchase of various amounts of its common stock, so that through December 29,
2002, the total authorized amount of common stock repurchases was $23,000,000.
The cumulative number of shares repurchased as of December 29, 2002, was
3,617,067 shares at a cost of $20,473,384.

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9. Income Taxes

The provision for income taxes from continuing operations consists of the
following:

|                           |         |   |            |            |      |   |            |           |  |   |           |          |  
|-------------------------- | ------- | - | ---------- | ---------- | ---- | - | ---------- | --------- |  | - | --------- | -------- | -
|                           |         |   | 2002       |            | 2001 |   | 2000      
|                           |         |   |            |            |      |   |           
|Current expense (benefit): |         |   |            |            |      |   |            |           |  |   |           |         
|                           | Federal |   | $          | (7,028,355 | )    |   | $          | 3,872,152 |  |   | $         | (981,125 | )
|                           | State   |   |            | (938,229   | )    |   |            | 210,996   |  |   |           |         |  
|                           |         |   |            |            |      |   |            |           |  |   |           |         
|                           |         |   | (7,966,584 | )          |      |   | 4,083,148  |           |  |   | (981,125  | )       
|Deferred expense (benefit) |         |   | (992,275   | )          |      |   | (3,298,148 | )         |  |   | 2,201,125 |         
|                           |         |   |            |            |      |   |            |           |  |   |           |         
|                           |         | $ | (8,958,859 | )          |      | $ | 785,000    |           |  | $ | 1,220,000 |         
|                           |         |   |            |            |      |   |            |           |  |   |           |         

The difference between income taxes using the effective income tax rate and the
statutory federal income tax rate is as follows:

|                                                    |  |      |             |      |  |      |          |   |  |   |           |  
|--------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | -------- | - |  | - | --------- | -
|                                                    |  | 2002 |             | 2001 |  | 2000
|                                                    |  |      |             |      |  |     
|Federal income tax based
on the statutory rate      |  | $    | (11,497,168 | )    |  | $    | 758,915  |   |  | $ | 766,803   |  
|State income taxes, less
federal income tax
benefit |  |      | (1,904,841  | )    |  |      | 70,554   |   |  |   | 262,557   |  
|Minority interest                                   |  |      | (60,855     | )    |  |      | (19,807  | ) |  |   | (20,036   | )
|Interest on deferred gain                           |  |      | 99,000      |      |  |      | 373,560  |   |  |   | 466,000   |  
|Previously accrued income
taxes                     |  |      |            |      |  |      | (451,465 | ) |  |   |          |  
|Change in valuation
allowance                       |  |      | 3,812,000   |      |  |      |         |   |  |   |          |  
|Permanent differences &
other                       |  |      | 593,005     |      |  |      | 53,243   |   |  |   | (255,324  | )
|                                                    |  |      |             |      |  |      |          |   |  |   |           |  
|                                                    |  | $    | (8,958,859  | )    |  | $    | 785,000  |   |  | $ | 1,220,000 |  
|                                                    |  |      |             |      |  |      |          |   |  |   |           |  

The Company reevaluated its tax exposure during the quarter ended December 30,
2001 and, as a result of the resolution of certain tax issues, reduced
previously accrued income tax liabilities by $451,465.

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Deferred tax (liabilities) assets are comprised of the following:

|                           |                                                                          |   |            |            |      |   |             |            |  
|-------------------------- | ------------------------------------------------------------------------ | - | ---------- | ---------- | ---- | - | ----------- | ---------- | -
|                           |                                                                          |   | 2002       |            | 2001
|                           |                                                                          |   |            |            |     
|Deferred tax liabilities:  |                                                                          |   |            |            |      |   |             |           
|                           | Differences between book and tax
basis of property                       |   | $          | (2,407,000 | )    |   | $           | (2,151,000 | )
|                           | Profits on installment sales                                             |   |            | (3,354,000 | )    |   |             | (8,722,000 | )
|                           | Unrealized gain on securities
available for sale                         |   |            |           |      |   |             | (64,000    | )
|                           | Other                                                                    |   |            | (465,000   | )    |   |             | (321,000   | )
|                           |                                                                          |   |            |            |      |   |             |           
|                           |                                                                          |   | (6,226,000 | )          |      |   | (11,258,000 | )         
|Deferred tax assets:       |                                                                          |   |            |            |      |   |             |           
|                           | Deferred profit on sales of hotels                                       |   |            | 3,703,000  |      |   |             | 6,154,000  |  
|                           | Direct financing leases                                                  |   |            | 88,000     |      |   |             | 88,000     |  
|                           | Differences between book and tax
losses recognized by minority
interests |   |            | 339,000    |      |   |             | 725,000    |  
|                           | Allowance for doubtful accounts                                          |   |            | 149,000    |      |   |             | 70,000     |  
|                           | Alternative minimum tax credits                                          |   |            | 281,000    |      |   |             | 281,000    |  
|                           | Net operating losses                                                     |   |            | 8,352,000  |      |   |             | 5,866,000  |  
|                           | Other                                                                    |   |            | 212,000    |      |   |             | 168,000    |  
|                           |                                                                          |   |            |            |      |   |             |           
|Total deferred tax asset   |                                                                          |   | 13,124,000 |            |      |   | 13,352,000  |           
|Valuation allowance        |                                                                          |   | (6,898,000 | )          |      |   | (3,086,000  | )         
|                           |                                                                          |   |            |            |      |   |             |           
|Deferred tax asset         |                                                                          |   | 6,226,000  |            |      |   | 10,266,000  |           
|                           |                                                                          |   |            |            |      |   |             |           
|Net deferred tax liability |                                                                          | $ |           |            |      | $ | (992,000    | )         
|                           |                                                                          |   |            |            |      |   |             |           

During September 2000, the Internal Revenue Service (the Service) issued a
Revenue Agents Report to the Company asserting income tax deficiencies and
additions to tax relating to the tax year ended December 28, 1997. The Company
filed a protest to the Services asserted deficiencies and additions to tax.
The amounts of the income tax deficiencies and additions to tax asserted does
not include interest which accrues from the dates the taxes were due until the
date of the payment. The asserted deficiencies are related solely to the
timing of taxable income between the four years from fiscal 1997 through fiscal
2000, in which year the Company provided taxes thereon. The Service submitted
a proposed agreement on August 6, 2001, and the Company accepted the agreement
on September 20, 2001. On March 22, 2002, the Company received a notice from
the Service of tax due for fiscal 1997 in the amount of $2,493,807 plus
statutory

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interest of $724,812 (no penalties). Both the income tax due and the
statutory interest
were accrued at December 30, 2001 and were paid in 2002.

The Company has a federal net operating loss carryforward of approximately
$12,831,000 as of December 29, 2002. In addition, the Company has state net
operating loss carryforwards of approximately $109,000,000 and $85,000,000 at
December 29, 2002 and December 30, 2001, respectively. These losses expire
from tax years 2003 through 2022. The Company also has available alternative
minimum tax credit carryforwards of $281,000 that can be used to offset future
taxes in years in which the alternative minimum tax credit does not apply. The
credit can be carried forward indefinitely.

The Company has evaluated the need for a valuation allowance on its net
deferred tax assets. In the past, the Company has provided a valuation
allowance for its state net operating losses. Because of the uncertainty of
the ultimate realization of the deferred tax asset, the Company has established
a valuation allowance for the entire asset in 2002. The total increase in the
valuation allowance for 2002 was $3,812,000.

10. Related Party Transactions

On July 5, 2000, the Board of Directors accelerated the vesting of certain
options held by the Companys president and chief executive officer to purchase
40,000 shares of common stock. He was expected to become fully vested under the
original terms of the options; the options had no intrinsic value on the date
of acceleration and, therefore, additional compensation expense was not
incurred as a result of the accelerated vesting. Immediately thereafter, the
president and chief executive officer of the Company exercised vested employee
stock options for 408,333 shares of the Companys common stock, at the exercise
price of $3.75 per share. He executed non-interest bearing, unsecured,
full-recourse promissory notes totaling $1,531,249 with maturity dates
coinciding with the expiration dates of each option grant, ranging from
February 11, 2002, to May 30, 2007. The closing market price of the Companys
common stock on July 5, 2000, was $3.31 per share. The Company recorded the
notes receivable of $1,531,249, net of unearned discount of $331,000, assuming
a market interest rate of 8.50%. During 2000, compensation expense was
recorded in the amount of $152,000 (the fair value of shares received less the
present value of the notes receivable using an 8.50% discount rate). The fair
value of shares issued of $1,352,603 has been recorded as paid-in capital, and
the notes receivable are recorded as a deduction from shareholders equity.
The Company has accreted $47,102, $102,055 and $40,611 of discount on these
notes as interest income in 2000, 2001, and 2002 respectively. The president
and chief executive officer renewed his non-interest bearing, unsecured,
full-recourse promissory

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note in the amount of $937,500 that came due February
11, 2002 with the Company for one year at an interest rate of prime plus 250
basis points. He paid the note and all accrued interest in full in December of
2002 and January of 2003 prior to its maturity date of February 11, 2003.

During 2002 the Company purchased three vehicles from a corporation owned by
the president and chief executive officer and a director of the Company, for an
aggregate purchase price of approximately $74,000. During 2001 the Company
purchased five vehicles for an aggregate purchase price of $120,000, and during
2000 purchased ten vehicles for an aggregate purchase price of approximately
$299,000 from the same corporation. The Companys chief executive officer sold
that corporation in November of 2002.

Construction and development revenue for the year ended December 29, 2002
includes $5,687,874 on contracts with outside businesses controlled by the
Companys president and chief executive officer. Construction contracts
receivable at December 29, 2002, include $5,671,892 due on these contracts. Of
this amount, $5,511,027 was incurred on one development, of which $4,982,000
has been collected by the Company subsequent to the balance sheet date.

11. Acquisitions

On May 3, 2002, the Company acquired all of the common stock of GuestHouse
International Franchise Systems, Inc. (GuestHouse) for $1.6 million of cash and
incurred $100,000 transaction costs. The estimated fair values of assets
acquired were $184,000 for accounts receivable, $750,000 for franchise rights
with an estimated useful life of three years, and $766,000 for goodwill. The
gross carrying amount of franchise rights was $750,000 as of December 29, 2002,
and accumulated amortization was $166,000. Amortization expense for the fiscal
year ended December 29, 2002, was $166,000. Franchise rights will be amortized
in the amounts of $250,000 in 2003, $250,000 in 2004, and $84,000 in 2005. All
goodwill is in the franchising, reservation and management segment. The
results of operations of GuestHouse are included in the consolidated statement
of earnings from the acquisition date forward.

The only material intangible assets held by the Company are the intangible
assets acquired in the GuestHouse acquisition, as all other material intangible
assets were written off as discussed in Note 1.

GuestHouse is the exclusive franchisor of the GuestHouse Inns & Suites hotel
brand, consisting of 71 properties open and operating (including 12 converted
from Shoneys

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Inns). As a result of the acquisition, the Company will now be
in charge of the operation
and growth of the GuestHouse brand. On May 21, 2002, the Company announced its
plan to convert the name of the Shoneys Inns and Shoneys Inns & Suites hotel
chain to GuestHouse International Inns & Suites as soon as practical. Five of
the Company-owned Shoneys Inns have thus far been converted to the GuestHouse
brand. Seven franchised
Shoneys Inns were converted to the GuestHouse brand in 2002.

As discussed in Note 13, on July 9, 2000, the Company completed a transaction
with Prime Hospitality Corp. (Prime) in which it sold to Prime all of its
leasehold interests in 24 Sumner Suites hotels. Also as discussed in Note 13,
the Company agreed with Hospitality Properties Trust (HPT), the owner of the
24 Sumner Suites whose leasehold rights were assigned to Prime, to construct
two hotels on sites owned by the Company. One of these construction projects
was completed in October 2001, and the hotel opened on October 3, 2001. The
other project was completed, and the hotel opened on February 7, 2002. The
Company gave HPT the right to exchange one or both of two specific hotels
included in the leasehold group for these two new properties, upon completion
of their construction. As of December 30, 2001, the completed hotel was being
operated by the Company as an AmeriSuites hotel, subject to HPTs exchange
option being exercised and consummated. The exchange subsequently occurred on
March 14, 2002. The other hotel was completed and opened by the Company as an
AmeriSuites hotel on February 7, 2002, and was operated by the Company pending
the exchange, which occurred April 9, 2002. The exchanges were accounted for
as the acquisition of businesses, and the hotels received in the exchange were
recorded at their fair value in the first fiscal quarter of 2002. The fair
value of the property and equipment of the two hotels received totaled $17.7
million and approximated the net book value of the two hotels exchanged;
accordingly, no goodwill or other intangible assets arose from the acquisition.
The results of operations of the two hotels exchanged are included in the
consolidated statement of operations from their opening to the exchange date.
The results of operations of the two hotels received in the exchanges are
included in the consolidated statement of operations from the exchange date
forward.

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The following pro forma information reflects the operations of GuestHouse and
the two hotels received in the exchange, as if the transactions had occurred as
of the first day of the period reported on (in thousands, except per share
data):

|                                           |         |   |                   |       |               |   |        |      | 
|------------------------------------------ | ------- | - | ----------------- | ----- | ------------- | - | ------ | ---- | 
|                                           |         |   | Fiscal Year Ended
|                                           |         |   |                  
|                                           |         |   | Dec. 29, 2002     |       | Dec. 30, 2001
|                                           |         |   |                   |       |              
|Net operating revenue                      |         | $ | 29,149            |       |               | $ | 47,998 |     
|Earnings (loss) from
continuing operations |         |   | (24,617           | )     |               |   | 851    |     
|Net income (loss)                          |         |   | (28,264           | )     |               |   | 150    |     
|Earnings (loss) per share:                 |         |   |                   |       |               |   |        |     
|                                           | Basic   |   | $                 | (5.53 | )             |   | $      | 0.03 | 
|                                           | Diluted |   |                   | (5.53 | )             |   |        | 0.03 | 

The pro forma results of operations do not purport to represent what the
Companys results would have been had such transactions, in fact, occurred at
the beginning of the periods presented or to project the Companys results of
operations in any future period.

12. Sale/Leaseback Transactions

In November 1997, the Company entered into a sale and leaseback agreement for
14 of its Sumner Suites hotels. In June 1999, the Company entered into a
similar sale and leaseback agreement with the same party for an additional six
of its Sumner Suites hotels. In May 2000, the Company entered into a third sale
and leaseback agreement with the same party for an additional four of its
Sumner Suites hotels. The assets of the hotels were sold to a real estate
investment trust, and the hotels continued to be operated by the Company until
the sale of leasehold interests on July 9, 2000 as described in Note 13 below.
The lease was classified as an operating lease.

The Company sold hotel assets in 1997 with a net book value of approximately
$101.5 million for $140 million in cash. The gain of approximately $34.9
million was initially
deferred and was being recognized on the straight-line method over the initial
lease term, as amended in 1999, as a reduction of rent expense. The 1999 cash
sale price of the six hotels was $65 million; these hotels had a net book value
of approximately $54 million. The $11 million gain was deferred and was being
recognized over the remainder of the 12-year lease term. The 2000 cash sale
price of the four hotels was $38.4 million; these

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hotels had a net book value
of approximately $34 million. The resulting $3.7 million gain was deferred and
was being recognized over the remainder of the 12-year lease term. The minimum
base rental was $25.6 million annually with contingent rent due of 8% of the
excess of the leased hotels base revenues (as defined in the lease agreement)
beginning in 1999. Contingent rentals totaled $91,000 during 1999 and $56,000
during 2000 to the date of sale of leasehold interests on July 9, 2000.

The Company was required to pay a deposit of $14 million (increased to $21.3
million in 1999 and to $25.6 million in 2000) to be retained by the purchaser
in the event of default
or nonobservance of the lease agreement. The deposit was to be refunded to the
Company at the end of the lease term in the event no default had occurred. The
Company was also required to provide an additional deposit of $14 million to be
retained by the purchaser in the event of default or nonobservance of the lease
agreement. This deposit earned interest
at a rate of 11.11% annually. Interest earned was credited to the required rent
payment due the lessor. The deposit was to be refunded to the Company upon the
earlier of achievement of certain operating results of the leased hotels or at
the end of the lease term in the event no default had occurred. As discussed in
Note 13, on July 9, 2000, the Company sold its leasehold interests in the 24
hotels to Prime Hospitality Corp. (Prime), and as a part of the transaction,
the Company assigned its interest to Prime in the two deposits related to the
lease: the $25.6 million in lease security deposits and the $14 million
additional deposit.

13. Sale of Leasehold Interests

On July 9, 2000, the Company completed a transaction with Prime Hospitality
Corp. (Prime) in which it sold to Prime all of its leasehold interests in 24
Sumner Suites hotels, for a total of $15.6 million (Note 12). The Company
received $14.0 million in cash, and retired its debt securities held by Prime
with a face value of $2.6 million and a fair value of $1.6 million. As a part
of the transaction, the Company assigned its interest to Prime in two deposits
related to the lease: the $14.0 million guaranty deposit and $25.6 million in
lease security deposits and the related supplies inventory at each hotel.

The Company also agreed, on July 9, 2000, with Hospitality Properties
Trust (HPT), the landlord whose consent was required to assign the lease to
Prime, to construct two hotels on sites owned by the Company. One of these
construction projects was completed in October 2001, and the hotel opened on
October 3, 2001. The other project was completed in February 2002 and the hotel
opened on February 7, 2002. These projects were funded by $13.9 million that
was escrowed from the cash proceeds from the sale of the leasehold interests to
Prime. The escrowed funds were owned by the Company and drawn down from the
escrow agent to finish the construction and

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furnishing of these hotels. The
Company, by an exchange option agreement dated July 9, 2000, also gave HPT the
right to exchange one or both of two specific hotels included in the leasehold
group for these two new hotels, upon completion of their construction. If the
Company had not consented to the property exchange, then HPT could have
required the Company to purchase the two specific hotels. Even though Prime
was not concerned, HPT was concerned about the two specific hotels in the
24-hotel lease being in close proximity to two existing AmeriSuites hotels
owned and operated by Prime. Since the Company was selling its interests in
all of its existing Sumner Suites hotels, it had no need to complete
the development of the two Sumner Suites hotels on the two sites. The exchange
option, therefore, served a business purpose for both HPT and the Company with
no objection from Prime. The exchanges were to be even exchanges with no
additional compensation involved. The sale of the leasehold interests to Prime
was not contingent upon the exchange option agreement between the Company and
HPT. The Company believes that Prime was aware of the existence of the
exchange option agreements at the time of the sale of the leasehold interests,
but Prime did not condition its willingness to complete the transaction on the
exchange option agreements being present. The $13.9 million was escrowed by
the Company to insure that the two new hotels would be completed to HPTs
satisfaction so that its exchange options would be executable. The Company had
already started development and construction of the two new hotels and needed a
source of funds to complete construction. The escrow of the funds to complete
hotels that were already under development was considered a non-event by the
Company, and from the Companys perspective, did not represent a restriction on
the use of its cash, but rather, represented a source of funds to complete
projects that had already been undertaken. The exchange option was between HPT
and the Company. Prime was aware of the exchange option, but had no agreement
with HPT concerning the exchange rights of HPT. HPT elected in the first
quarter of 2002 to exercise its exchange options on both hotels. As discussed
in Note 11, the exchanges of the two hotels occurred on March 14, 2002 and
April 9, 2002.

The Company further agreed to lease to Prime three other Sumner Suites hotels,
which the Company owns. The 11-year lease provides for initial minimum annual
rental payments of $2.9 million, increasing to $3.1 million if the lease is
extended, and also provides for percentage rents based on hotel sales, as
defined. The Company has not earned any contingency rental income to date.
Prime has converted all 27 of the Sumner Suites hotels to the AmeriSuites
brand. The Company agreed to not operate any other all-suites hotels in
competition with Prime within a defined geographic radius of each of the hotels
being sold. This restriction will not prevent the Company from developing
hotels for others in the restricted area or operating or franchising any of its
proprietary brands of hotels in the restricted area.

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In 2000, the Company recognized a gain of $3.6 million, continued to defer
gains of $4.1 million from previous sale/leaseback transactions on the two
hotels subject to possible exchange, and recognized gains related to the early
extinguishment of the debt securities received from Prime of $855,000, all
before income tax. In addition, the Company agreed to construct one 124-room
AmeriSuites hotel for Prime on a site owned by Prime at a construction and
development price of $76,500 per room, less Primes cost of the land. This
construction was completed in 2001. The Company also agreed to provide
reservation services to Prime for all of its existing hotels, for a fee based
on a percentage of room revenue. Reservation service fees are now included in
franchising, management
and reservation services revenues. The reservation system technology was
enhanced in order to accommodate Primes requirements, and was ready to add
these additional hotel properties in early 2001. However, Prime failed to
commence use of the Companys reservation services as agreed, and on June 25,
2001, the Company filed an arbitration proceeding against Prime, seeking $20
million in monetary damages. The parties selected an arbitrator, and the
arbitration hearing was held during the week of April 15, 2002. The results of
the arbitration proceeding were released on June 28, 2002. The Arbitrator
ruled that Primes material breach of contract caused the Company to lose $8.9
million in anticipated profit under the terms of the Agreement. The Arbitrator
accordingly awarded the Company its full damages of $8.9 million, to be paid
within 30 days of the award. Prime paid the award by wire transfer on August
1, 2002. The Company recorded the $8.9 million receivable and earnings in its
second fiscal quarter of 2002.

14. Sale of Hotels

During 1998, the Company sold 16 of its company-owned Shoneys Inn hotels for
$90 million. The sales price consisted of $22.5 million in cash with the
balance of $67.5 million in the form of interest-bearing promissory notes that
are currently collateralized by 15 of the Shoneys Inn hotels that were sold.
These notes contain cross-collateralization and cross-default provisions. The
notes are currently being amortized on a 23-year amortization period at a 6.50%
interest rate, and mature on July 30, 2003. Annually, on July 30, the then
principal balance of the notes are amortized over one less year and at an
interest rate adjusted based upon a formula tied to 5-year U. S. Treasury
rates. Profit was recognized on twelve of the sales under the full accrual
method of accounting. Profit of approximately $12 million on the other four
hotels sold was accounted for under the installment method as the minimum
initial cash down payment specified by SFAS No. 66, Accounting for Sales of
Real Estate, was not satisfied at the purchase date. Of the $12 million
profit, $77,000 was recognized in 1998, with the remaining $11.9 million
recognized in 1999 as the required minimum cash down payment for each of the
four hotels was received.

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The common owner of the 15 hotels has notified the Company that it is unlikely
that it will be able to repay or refinance the 15 first mortgage notes payable
to the Company by their maturity dates. The Company does not desire to extend
the maturity dates and, therefore, anticipates that it will be necessary to
resume title to the properties. The owner of the properties agreed in late
December of 2002 to transfer the hotels back to the Company by deeds in lieu of
foreclosure. In anticipation of this, the Company began in the fourth quarter
of 2002 to seek cash purchasers of the properties in the event the Company
re-acquired ownership, since the Company does not desire to take back ownership
and operate the hotels. The owner of the properties is carried on the
Companys payroll system as a non-officer employee; his services are considered
necessary to assist the
Company in its efforts to locate cash purchasers for the properties. Based
upon offers recently received, it is likely that the Company will sell the
properties at values significantly below the balances of the notes receivable.
Consequently, the balances of the 15 notes receivable were written down to the
estimated net selling prices of the 15 hotels, resulting in a write-down of
$18.1 million in the fourth quarter of 2002. In addition to the write-down of
these 15 notes receivable, notes receivable on three other hotels were written
down $3.1 million, based on the borrowers credit worthiness and ability to
refinance in the open market. Also, unsecured accounts receivable which related
to the 15 properties were deemed to be uncollectible and were written off in
the amount of approximately $1.3 million in the fourth quarter of 2002.

15. Transfer of Hotels

The Company transferred five of its company-owned hotels on December 27, 2002
for non-amortizing notes receivable totaling $11.6 million that have a maturity
of six months and accrue interest at the prime rate plus 300 basis points.
Accordingly, the transaction did not qualify as a sale for accounting purposes,
and the properties will continue to be carried on the Companys consolidated
balance sheet as assets of hotels transferred under contractual agreements
(notes receivable). The transaction did, however, qualify as a sale for
federal income tax purposes, allowing the Company to accelerate tax deductions
to carry back a greater net operating loss to 1997, resulting in a larger
refund of federal income taxes in 2003. The buyer, who is also the common
owner of the 15 hotels discussed in Note 14, intends to resell the hotels;
however, if unsuccessful and the hotels ultimately have to be taken back by the
Company, the Company intends to pursue other potential buyers. The notes
receivable totaling $11.6 million represents the estimated fair values of the
five hotels. Three of the properties have been resold by the buyer in the
first fiscal quarter of 2003 and the net proceeds were used to pay the notes.
The proceeds from the sales approximated the balance of the notes. Contracts
for the resale by the buyer of the remaining two hotels are pending with
closing of the sales expected to occur

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within six months of December 27, 2002,
with net proceeds to be used to pay the notes in full. The proceeds from these
sales are expected to approximate the balance of the notes. The net book value
of the assets transferred was $17.0 million at the time of transfer. The
related historical results of operations of $1.4 million loss and the loss on
the transfer of $5.5 million on the five hotels transferred is reported in
discontinued operations in the Companys consolidated statements of operations.
In addition, the Company sold two other hotels with a net book value of $7.4
million to outside parties for $8.2 million for which the historical results of
operations of $271,000 in earnings and a gain on sale of disposal of $769,000
are also included in results of discontinued operations.

16. Supplemental Cash Flow Information

|                                                             |            |            |                                                                                                   |  |      |            |            |   |      |           |            |  |   |           | 
|------------------------------------------------------------ | ---------- | ---------- | ------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---------- | - | ---- | --------- | ---------- |  | - | --------- | 
|                                                             |            |            |                                                                                                   |  | 2002 |            | 2001       |   | 2000
|                                                             |            |            |                                                                                                   |  |      |            |            |   |     
|Cash paid during the year for
interest                       |            | $          | 8,704,198                                                                                         |  |      | $          | 8,776,470  |   |      | $         | 11,114,856 | 
|                                                             |            |            |                                                                                                   |  |      |            |            |   |      |           |            | 
|Cash (received) paid during the
year (from) for income taxes |            | $          | 120,201                                                                                           |  |      | $          | (4,253,461 | ) |      | $         | 634,046    | 
|                                                             |            |            |                                                                                                   |  |      |            |            |   |      |           |            | 
|Significant non-cash activities:                             |            |            |                                                                                                   |  |      |            |            |   |      |           |            | 
|                                                             | Investing: |            |                                                                                                   |  |      |            |            |   |      |           |            |  |  
|                                                             |            |            | Proceeds from sale
and transfer of
property arising from
notes receivable                         |  | $    | 15,389,938 |            |   | $    | 6,507,500 |            |  | $ | 2,850,000 | 
|                                                             |            |            | Proceeds from sale of
leasehold interests
arising from
repurchase of
long-term debt at a
discount |  |      |           |            |   |      |          |            |  |   | 1,617,625 | 
|                                                             |            | Financing: |                                                                                                   |  |      |            |            |   |      |           |            |  |   |          
|                                                             |            |            | Exercise of stock
options financed by
notes receivable                                            |  |      |           |            |   |      |          |            |  |   | 1,531,249 | 
|                                                             |            |            | Exchange of long-term
debt at a
discount                                                          |  |      | 1,393,420  |            |   |      |          |            |  |   |          | 
|                                                             |            |            |                                                                                                   |  |      |            |            |   |      |           |            | 
|                                                             |            | $          | 16,783,358                                                                                        |  |      | $          | 6,507,500  |   |      | $         | 5,998,874  | 
|                                                             |            |            |                                                                                                   |  |      |            |            |   |      |           |            | 

17. Operating Segment Information

The Companys significant operating segments are hotel operations; franchising,
reservation, and management services; and construction and development. The
hotel

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operations segment has represented approximately 70%, 18%, and 31% of
total revenues for the years ended December 31, 2000, December 30, 2001 and
December 29, 2002, respectively. The construction and development segment
represented approximately 35% of total revenues in the year ended December 29,
2002, as compared with approximately 21% in 2000 and 64% in 2001. None of
the Companys segments conduct foreign operations. Operating profit includes
the operating revenues and expenses directly identifiable with the operating
segment. Identifiable assets are those used directly in the operations of each
segment.

Revenues from the franchising, reservation, and management segment include
franchising revenues from one controlled group of franchisees of 16 Shoneys
Inns which contributed $920,000, or 25.5%, and $1.9 million, or 45.9%, and no
revenue and 0% of total
franchising and management revenues, after elimination of intersegment amounts,
in 2000, 2001 and 2002, respectively. Construction and development segment
revenues earned in 2000 included two construction contracts with two customers
comprising approximately $10.5 million, or 87.5%, of total construction
revenues. Construction and development segment revenues earned in 2001 included
three construction contracts with three customers comprising approximately
$21.6 million, or 78.6%, of total construction and development revenues.
Construction and development segment revenues earned in 2002 included three
construction contracts with three customers comprising approximately $9.8
million, or 98.4%, of total construction and development revenues.

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A summary of the Companys operations by segment follows (in thousands of
dollars):

|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |         |  
|----------------------------------- | ---------------------------------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                    |                                                                  |   | 2002    |         | 2001 |   | 2000   
|                                    |                                                                  |   |         |         |      |   |        
|Revenues:                           |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|                                    | Hotel revenues from
external customers                           |   | $       | 13,039  |      |   | $       | 12,224  |   |   | $       | 43,397  |  
|                                    | Franchising, reservation
and management                          |   |         | 7,326   |      |   |         | 5,319   |   |   |         | 6,975   |  
|                                    | Construction and development                                     |   |         | 12,486  |      |   |         | 41,651  |   |   |         | 15,094  |  
|                                    | Elimination of intersegment
franchising and
construction revenue |   |         | (4,518  | )    |   |         | (16,156 | ) |   |         | (7,141  | )
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|Total revenues                      |                                                                  | $ | 28,333  |         |      | $ | 43,038  |         |   | $ | 58,325  |        
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|Operating loss:                     |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|                                    | Hotel                                                            |   | $       | 2,745   |      |   | $       | 3,319   |   |   | $       | (117    | )
|                                    | Franchising, reservation
and management                          |   |         | (39,130 | )    |   |         | (5,821  | ) |   |         | (5,660  | )
|                                    | Construction and development                                     |   |         | (6,099  | )    |   |         | 1,965   |   |   |         | (327    | )
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|Total operating loss                |                                                                  | $ | (42,484 | )       |      | $ | (537    | )       |   | $ | (6,104  | )      
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|Total assets:                       |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|                                    | Hotel                                                            |   | $       | 89,433  |      |   | $       | 101,599 |   |   | $       | 84,593  |  
|                                    | Franchising, reservation
and management                          |   |         | 69,679  |      |   |         | 95,037  |   |   |         | 117,124 |  
|                                    | Construction and development                                     |   |         | 8,167   |      |   |         | 9,951   |   |   |         | 2,914   |  
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|Total assets                        |                                                                  | $ | 167,279 |         |      | $ | 206,587 |         |   | $ | 204,631 |        
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|Capital expenditures:               |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|                                    | Hotel                                                            |   | $       | 1,002   |      |   | $       | 18,211  |   |   | $       | 3,596   |  
|                                    | Franchising, reservation
and management                          |   |         | 1,068   |      |   |         | 2,555   |   |   |         | 5,128   |  
|                                    | Construction and development                                     |   |         | 1,876   |      |   |         | 166     |   |   |         | 107     |  
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|Total capital expenditures          |                                                                  | $ | 3,946   |         |      | $ | 20,932  |         |   | $ | 8,831   |        
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|Depreciation and amortization:      |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|                                    | Hotel                                                            |   | $       | 2,371   |      |   | $       | 2,258   |   |   | $       | 3,326   |  
|                                    | Franchising, reservation
and management                          |   |         | 906     |      |   |         | 1,068   |   |   |         | 1,129   |  
|                                    | Construction and development                                     |   |         | 59      |      |   |         | 66      |   |   |         | 47      |  
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        
|Total depreciation and
amortization |                                                                  | $ | 3,336   |         |      | $ | 3,392   |         |   | $ | 4,502   |        
|                                    |                                                                  |   |         |         |      |   |         |         |   |   |         |        

18. Defined Contribution Plan

In 2000, the Company began sponsoring a 401(k) defined contribution plan for
all employees. Eligible participants may contribute up to 15% of their annual
compensation,
subject to maximum amounts established by the United States Internal Revenue
Service (the IRS). The Company makes matching contributions which equal 20%
of the first

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6% of annual compensation contributed to the plan by each
employee, subject to
maximum amounts established by the IRS. The Companys contributions under this
plan
totaled $80,782 in 2000, $51,985 in 2001, and $49,133 in 2002.

19. Quarterly Financial Information (Unaudited)

The following is a summary of the unaudited quarterly financial information for
the years ended December 29, 2002 and December 30, 2001:

|     |                                            |  |                              |        |                                          |      |        |        |       |     |        |        |   |      |   |         |   |       |  
|---- | ------------------------------------------ |  | ---------------------------- | ------ | ---------------------------------------- | ---- | ------ | ------ | ----- | --- | ------ | ------ | - | ---- | - | ------- | - | ----- | -
|     |                                            |  |                              |        | Quarters                                
|     |                                            |  |                              |        |                                         
|     |                                            |  |                              |        | First                                    |      | Second |        | Third |     | Fourth
|     |                                            |  |                              |        |                                          |      |        |        |       |     |       
|     |                                            |  |                              |        | (in thousands except for per share data)
|2002 |                                            |  |                              |        |                                          |      |        |        |       |     |        |        |   |      |   |        
|     | Revenues                                   |  | $                            | 8,834  |                                          |      | $      | 5,473  |       |     | $      | 7,427  |   |      | $ | 6,599   |  
|     | Operating loss                             |  |                              | (667   | )                                        |      |        | (8,313 | )     |     |        | (1,126 | ) |      |   | (32,378 | )
|     | (Loss) earnings from
continuing operations |  |                              | (916   | )                                        |      |        | 1,143  |       |     |        | (1,289 | ) |      |   | (23,615 | )
|     | Discontinued operations                    |  |                              | (100   | )                                        |      |        | 119    |       |     |        | (207   | ) |      |   | (3,382  | )
|     | Net (loss) income                          |  |                              | (1,016 | )                                        |      |        | 1,262  |       |     |        | (1,496 | ) |      |   | (26,997 | )
|     | Net (loss) earnings per share:             |  |                              |        |                                          |      |        |        |       |     |        |        |   |      |   |         |  
|     | Basic:                                     |  |                              |        |                                          |      |        |        |       |     |        |        |   |      |   |         |  
|     |                                            |  | From continuing operations   |        |                                          | (.18 | )      |        |       | .22 |        |        |   | (.25 | ) |         |   | (4.61 | )
|     |                                            |  | From discontinued operations |        |                                          | (.02 | )      |        |       | .03 |        |        |   | (.04 | ) |         |   | (.66  | )
|     |                                            |  | Net (loss) income            |        |                                          | (.20 | )      |        |       | .25 |        |        |   | (.29 | ) |         |   | (5.27 | )
|     | Diluted:                                   |  |                              |        |                                          |      |        |        |       |     |        |        |   |      |   |         |  
|     |                                            |  | From continuing operations   |        |                                          | (.18 | )      |        |       | .22 |        |        |   | (.25 | ) |         |   | (4.61 | )
|     |                                            |  | From discontinued operations |        |                                          | (.02 | )      |        |       | .02 |        |        |   | (.04 | ) |         |   | (.66  | )
|     |                                            |  | Net (loss) income            |        |                                          | (.20 | )      |        |       | .24 |        |        |   | (.29 | ) |         |   | (5.27 | )
|2001 |                                            |  |                              |        |                                          |      |        |        |       |     |        |        |   |      |   |        
|     | Revenues                                   |  | $                            | 9,314  |                                          |      | $      | 9,223  |       |     | $      | 11,636 |   |      | $ | 12,865  |  
|     | Operating (loss) earnings                  |  |                              | (452   | )                                        |      |        | 152    |       |     |        | 177    |   |      |   | (414    | )
|     | Earnings (loss) from
continuing operations |  |                              | 1,680  |                                          |      |        | 43     |       |     |        | 255    |   |      |   | (589    | )
|     | Discontinued operations                    |  |                              | (94    | )                                        |      |        | 10     |       |     |        | (163   | ) |      |   | (230    | )
|     | Net income (loss)                          |  |                              | 1,586  |                                          |      |        | 53     |       |     |        | 92     |   |      |   | (819    | )
|     | Net income (loss) per share:               |  |                              |        |                                          |      |        |        |       |     |        |        |   |      |   |         |  
|     | Basic:                                     |  |                              |        |                                          |      |        |        |       |     |        |        |   |      |   |         |  
|     |                                            |  | From continuing operations   |        |                                          | .30  |        |        |       | .01 |        |        |   | .05  |   |         |   | (.11  | )
|     |                                            |  | From discontinued operations |        |                                          | (.01 | )      |        |       | .00 |        |        |   | (.03 | ) |         |   | (.05  | )
|     |                                            |  | Net income (loss)            |        |                                          | .29  |        |        |       | .01 |        |        |   | .02  |   |         |   | (.16  | )
|     | Diluted:                                   |  |                              |        |                                          |      |        |        |       |     |        |        |   |      |   |         |  
|     |                                            |  | From continuing operations   |        |                                          | .30  |        |        |       | .01 |        |        |   | .05  |   |         |   | (.11  | )
|     |                                            |  | From discontinued operations |        |                                          | (.01 | )      |        |       | .00 |        |        |   | (.03 | ) |         |   | (.05  | )
|     |                                            |  | Net income (loss)            |        |                                          | .29  |        |        |       | .01 |        |        |   | .02  |   |         |   | (.16  | )

The Company reported a net loss in the fourth quarter of 2002 of $27.0 million.
The losses are primarily the result of write-downs of notes and write-offs of
related accounts

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receivable due to the impaired values of hotels underlying the
receivables and losses on the
sale and transfer of hotels, as discussed in Notes 14 and 15, and charge-offs
of construction and development costs on abandoned hotel development projects,
as discussed in Note 1.

20. Subsequent Events

As discussed in Note 14 above, the owner of 15 hotels collateralizing 15 first
mortgage notes receivable held by the Company agreed in December of 2002 to
transfer the hotels back to the Company by deeds in lieu of foreclosure. The
Company has been seeking cash purchasers of the properties. Subsequent to the
end of 2002, the Company has been successful in taking title to four of the 15
properties and selling them for cash totaling
$10.5 million.

As discussed in Note 15 above, on December 27, 2002, the Company transferred
five of its company-owned hotels in exchange for notes receivable with a
maturity of six months. The properties are carried on the Companys balance
sheet as assets of hotels transferred under contractual agreements at a value
of $11.6 million. The buyer intends to resell the hotels. On March 6, 2003,
one of the five hotels was resold for $2.9 million, and the net proceeds were
paid to the Company to repay the loan on this hotel. Contracts to resell the
remaining four hotels are pending.

On February 3, 2003, the Company received the consent order and final judgment
in a civil action filed in the United States District Court in Atlanta, GA, for
OGara Aviation, L.L.C., Plaintiff v. ShoLodge, Inc., Defendant and for
ShoLodge, Inc. and Nashville Air Associates, Plaintiffs, v. OGara Aviation
Company and OGara Aviation, L.L.C. against Defendant ShoLodge, Inc. in the
principal sum of $625,000. This amount has been provided for in the year ended
December 29, 2002.

As discussed in Note 13 above, Prime leased three hotels from the Company in
July of 2000 for an initial lease term of 11 years with a base rent of $2.9
million per year payable monthly during the initial term. In April of 2003,
Prime defaulted on the lease of the three hotels and turned the operation of
the properties back over to the Company. The Company took over the operation
of these hotels on April 4, 2003, and is currently operating them as
AmeriSuites hotels.

As discussed in Note 3 above, the Company maintains a $30.0 million three-year
credit facility with a financial institution. On April 11, 2003, a third
amendment to the credit facility became effective, reducing the required
minimum consolidated net worth and waiving the credit facilitys cross-default
provisions.

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21. Discontinued Operations

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No.
144).SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.SFAS No. 144
requires that long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
been incurred. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. Due to the
adoption of SFAS 144, the Company now reports as discontinued operations assets
held for sale (as defined by SFAS 144) and assets sold in the current period.
All results of these discontinued operations are included in a separate
component of income on the consolidated statements of operations under the
heading, operations of hotels disposed of and transferred. This change has
resulted in certain reclassifications of 2001 and 2000 financial statement
amounts.

The following table summarizes the results of operations for the five
properties transferred, as discussed in Note 15, and two properties sold from
the hotel operations segment for the three years ended December 29, 2002,
December 30, 2001, and December 31, 2000 (amounts in thousands):

|                   |                               |                |   |              |       |              |   |              |       |  |   |       |       | 
|------------------ | ----------------------------- | -------------- | - | ------------ | ----- | ------------ | - | ------------ | ----- |  | - | ----- | ----- | 
|                   |                               |                |   | Year ended  
|                   |                               |                |   |             
|                   |                               |                |   | December 29, |       | December 30, |   | December 31,
|                   |                               |                |   | 2002         |       | 2001         |   | 2000        
|                   |                               |                |   |              |       |              |   |             
|Revenues:          |                               |                |   |              |       |              |   |              |       |  |   |      
|                   | Hotel                         |                | $ | 5,729        |       |              | $ | 5,895        |       |  | $ | 5,753 |      
|                   | Other income                  |                |   |             |       |              |   |             |       |  |   |      |      
|                   |                               |                |   |              |       |              |   |              |       |  |   |      
|                   |                               | Total revenues |   |              | 5,729 |              |   |              | 5,895 |  |   |       | 5,753 | 
|Cost and expenses: |                               |                |   |              |       |              |   |              |       |  |   |      
|                   | Hotel                         |                |   | 5,626        |       |              |   | 5,158        |       |  |   | 4,932 |      
|                   | General and administrative    |                |   | 120          |       |              |   | 68           |       |  |   | 9     |      
|                   | Depreciation and amortization |                |   | 938          |       |              |   | 1,268        |       |  |   | 1,284 |      
|                   |                               |                |   |              |       |              |   |              |       |  |   |      
|                   |                               | Total expenses |   |              | 6,684 |              |   |              | 6,494 |  |   |       | 6,225 | 

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|                                                                           |  |   |        |              |   |              |      |              |  |   |      |   |  | 
|-------------------------------------------------------------------------- |  | - | ------ | ------------ | - | ------------ | ---- | ------------ |  | - | ---- | - |  | 
|                                                                           |  |   |        | Year ended  
|                                                                           |  |   |        |             
|                                                                           |  |   |        | December 29, |   | December 30, |      | December 31,
|                                                                           |  |   |        | 2002         |   | 2001         |      | 2000        
|                                                                           |  |   |        |              |   |              |      |             
|Gain on sale of property                                                   |  |   |       |              |   |              | 1    |              |  |   |     |  
|Interest expense                                                           |  |   | (104   | )            |   |              | (175 | )            |  |   | (240 | )
|Interest income                                                            |  |   | 1      |              |   |              | 3    |              |  |   | 67   |  
|                                                                           |  |   |        |              |   |              |      |              |  |   |      |  
|Loss before income taxes                                                   |  |   | (1,058 | )            |   |              | (770 | )            |  |   | (645 | )
|Income tax benefit                                                         |  |   | 402    |              |   |              | 293  |              |  |   | 245  |  
|                                                                           |  |   |        |              |   |              |      |              |  |   |      |  
|Operations of hotels disposed of and
transferred, net of income tax effect |  | $ | (656   | )            | $ |              | (477 | )            |  | $ | (400 | )
|                                                                           |  |   |        |              |   |              |      |              |  |   |      |  

The assets and liabilities of the five properties transferred presented in
the accompanying consolidated balance sheets are as follows (amounts in
thousands):

|                            |              |   |              |            |              |   |            |            | 
|--------------------------- | ------------ | - | ------------ | ---------- | ------------ | - | ---------- | ---------- | 
|                            |              |   | December 29, |            | December 30,
|                            |              |   | 2002         |            | 2001        
|                            |              |   |              |            |             
|Assets                      |              |   |              |            |              |   |            |           
|Other current assets        |              | $ | 43,275       |            |              | $ | 43,275     |           
|Property and equipment, net |              |   | 11,438,467   |            |              |   | 18,069,730 |           
|Other assets                |              |   | 89,822       |            |              |   | 91,677     |           
|                            |              |   |              |            |              |   |            |           
|                            | Total assets |   | $            | 11,571,564 |              |   | $          | 18,204,682 | 
|                            |              |   |              |            |              |   |            |           

As of December 30, 2001, the assets of the two properties sold and the two
properties exchanged were 12% of other current assets, 33% of net property and
equipment, and 3% of other assets.

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ShoLodge, Inc. and Subsidiaries

Valuation and Qualifying Accounts

Schedule II

Years ended December 31, 2000, December 30, 2001, and December 29, 2002

|                             |                                            |  |                   |         |              |  |                   |         |                |  |           |         |                   |  |   |          |   |  |   |         | 
|---------------------------- | ------------------------------------------ |  | ----------------- | ------- | ------------ |  | ----------------- | ------- | -------------- |  | --------- | ------- | ----------------- |  | - | -------- | - |  | - | ------- | 
|                             |                                            |  |                   |         |              |  |                   |         |                |  | Additions |         |                   |  |   |          |   |  |  
|                             |                                            |  |                   |         |              |  | Additions Charged |         | Charged to     |  |           |         |                   |  |   |          |  
|                             |                                            |  | Balance at        |         | to Costs and |  | Other             |         |                |  |           |         | Balance at End of
|                             |                                            |  | Beginning of Year |         | Expenses     |  | Accounts (2)      |         | Deductions (1) |  | Year     
|                             |                                            |  |                   |         |              |  |                   |         |                |  |          
|Year ended
December 31, 2000 |                                            |  |                   |         |              |  |                   |         |                |  |           |         |                   |  |   |          |   |  |   |        
|                             | Allowance for
doubtful accounts
receivable |  | $                 | 459,869 |              |  | $                 | 213,723 |                |  | $         |        |                   |  | $ | (293,278 | ) |  | $ | 380,314 | 
|                             |                                            |  |                   |         |              |  |                   |         |                |  |           |         |                   |  |   |          |   |  |   |        
|Year ended
December 30, 2001 |                                            |  |                   |         |              |  |                   |         |                |  |           |         |                   |  |   |          |   |  |   |        
|                             | Allowance for
doubtful accounts
receivable |  | $                 | 380,314 |              |  | $                 | 127,816 |                |  | $         |        |                   |  | $ | (323,726 | ) |  | $ | 184,404 | 
|                             |                                            |  |                   |         |              |  |                   |         |                |  |           |         |                   |  |   |          |   |  |   |        
|Year ended
December 29, 2002 |                                            |  |                   |         |              |  |                   |         |                |  |           |         |                   |  |   |          |   |  |   |        
|                             | Allowance for
doubtful accounts
receivable |  | $                 | 184,404 |              |  | $                 | 631,801 |                |  | $         | 290,000 |                   |  | $ | (711,725 | ) |  | $ | 394,480 | 
|                             |                                            |  |                   |         |              |  |                   |         |                |  |           |         |                   |  |   |          |   |  |   |        



|(1) |  | Represents write-offs of uncollectible accounts receivable
|--- |  | ----------------------------------------------------------
|   
|(2) |  | Allowance of acquired Company                             

S-1