<PAGE>


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

FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001       COMMISSION FILE NUMBER 0-19840

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

            TENNESSEE                                         62-1015641
  (State or other jurisdiction                             (I.R.S. Employer
of incorporation or organization)                       Identification Number)

130 MAPLE DRIVE, NORTH, HENDERSONVILLE, TENNESSEE                37075
   (Address of principal executive offices)                   (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 [ ]

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]

Aggregate market value of the voting stock held by non-affiliates of the
registrant on March 21, 2002, was approximately $11,500,000. The market value
calculation was determined using the last sale price of registrant's common
stock on March 21, 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 March 21, 2002, were
5,118,778.


<PAGE>



                       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 2002.

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


<PAGE>


                                     PART I

ITEM 1. BUSINESS.

GENERAL

            The Company develops, owns and, through July 9, 2000, operated
all-suites hotels under the Sumner Suites brand name, and is an operator and the
exclusive franchisor of Shoney's Inns. The Company's 27 Sumner Suites hotels
owned and operated through July 9, 2000 were mid-scale, all-suites hotels
located in Arizona, Colorado, Florida, Georgia, Indiana, Kansas, New Mexico,
North Carolina, Ohio, Tennessee, Texas and Virginia. See "Sale of Leasehold
Interests" below for a discussion of the transaction which transferred the
operations of all of the 27 Sumner Suites hotels to Prime Hospitality Corp.
("Prime") effective with the close of business on July 9, 2000. As of December
30, 2001, the Shoney's Inn lodging system consisted of 70 Shoney's Inns
containing 6,681 rooms of which 30 containing 3,612 rooms are owned or managed
by the Company. Shoney's Inns are currently located in 16 states with a
concentration in the Southeast.

            There are no plans to develop and operate Sumner Suites hotels in
the near term. The Company is, however, developing this type of hotel for third
parties, including new AmeriSuites hotels for Prime. Also, the Company retains
ownership of the Sumner Suites registered trademark and may continue to develop
hotels under this name in the longer term.

            Shoney's Inns operate in the upper 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 Shoney's Inn includes
60 to 120 rooms and, in most cases, meeting rooms. Although Shoney's Inns do not
offer full food service, most offer continental breakfast and most of the
Shoney's Inns are located adjacent or in close proximity to Shoney's
restaurants. Management believes that its strategy of locating most of its
Shoney's Inns in close proximity to free-standing Shoney's 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 for third 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, 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.


                                      -1-
<PAGE>



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
interest in 24 Sumner Suites hotels, for a total of $15.6 million. The Company
received $100,000 in cash, $13.9 million in the form of an escrow fund 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 to construct two hotels on sites then 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. These projects were funded by the
$13.9 million escrow money from the sale and any excess escrow funds were to be
released to the Company. No excess funds were available to be released upon
completion of the two hotels. The Company also gave Hospitality Properties Trust
("HPT"), the owner of the 24 Sumner Suites whose leasehold rights were assigned
to Prime, 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, without payment or receipt of any additional consideration. If the
Company did not consent to the property exchange, then HPT could have required
the Company to purchase the two properties. 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 is being
operated by the Company pending the exchange, which is expected to occur before
the end of the Company's first fiscal quarter ending April 21, 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. 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
Shoney's Inn brand hotel in the restricted area.

            The Company recognized a gain of $3.6 million, continued to defer
gains of $4.1 million from previous sale/leaseback transactions on two of the
hotels subject to possible exchange, and recognized extraordinary 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 presently 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 the fourth quarter of 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.


                                      -2-
<PAGE>

Reservation service fees are now included in franchising and management
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
have selected an arbitrator, and the arbitration hearing has been scheduled to
begin on April 15, 2002.

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 and
controlling operating costs, (ii) expanding the Shoney's Inn 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 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 Shoney's Inn System. In the recent past the Company has
focused on expanding the Shoney's Inn system principally through the addition of
new franchises. Two franchised Shoney's Inns were opened in fiscal 2001, five
hotels left the Shoney's Inn system, and two Company-owned Shoney's Inns were
sold to franchisees. As of 2001 fiscal year-end, there were 70 Shoney's Inns (of
which 12 are Company owned) with a total of 6,681 rooms. The Company targets
existing Shoney's Inn franchisees, other hotel brand developers and contacts
within the industry as potential franchisees for additional Shoney's Inns.

            Reservation Services. The Company provides reservation services to
its Shoney's Inn franchisees and to other hotel chains and independent hotel
operators. This call center ("InnLink") continues to expand its customer base,
currently serving approximately 550 hotels as compared with approximately 100
hotels a year ago. The Company is continuing to aggressively market this
service, capitalizing on its state of the art technology.

            Development of Additional All-Suite Hotels. Currently, no Sumner
Suites hotels are owned, under construction, or planned for the near term. The
Company has developed and opened two AmeriSuites hotels for Prime on sites that
it owns. See "Sale of Leasehold Interests" above. The Company is developing and
constructing all-suite hotels for third parties and expects to continue to do so
in the immediate future.

            In addition to the strategies described above, the Company may from
time to time investigate various alternatives to maximize shareholder value.


                                      -3-
<PAGE>

These alternatives could include, without limitation, a sale of the remaining
Shoney's Inns, 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.

SHONEY'S INNS CONCEPT

            Shoney's Inns are limited-service hotels positioned in the upper
economy segment to appeal to both business and leisure travelers and are located
in 16 states in markets ranging from small towns to larger metropolitan areas.
Shoney's Inns are generally located in proximity to interstate highways, major
streets and highways providing convenient access to business establishments.
Most of the Shoney's Inns are located adjacent or in close proximity to a
Shoney's restaurant. Management believes that its strategy of locating its
Shoney's Inns in close proximity to free-standing Shoney's restaurants gives it
a competitive advantage over many other limited-service lodging chains. Daily
room rates at Shoney's Inns range from $40 to $65 and vary depending upon a
number of factors, including location, competition and type of room. For fiscal
2001, the average daily room rate for Company-owned Shoney's Inns was $50.89.

            Historically, the typical Shoney's Inn has been a two story,
exterior corridor, brick veneer building with plate glass fronts, containing 100
to 125 rooms. New prototypes for Shoney's 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 Shoney's Inns. 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 Shoney's Inns include swimming pools,
meeting rooms, facsimile machine service and continental breakfast. The Company
believes that Shoney's Inns provides its guests with quality accommodations at
an attractive price/value relationship within the upper economy segment.

HOTEL CONSTRUCTION AND DEVELOPMENT

            The Company's construction subsidiary has a full time staff who
manage, supervise, control and perform the construction of the hotels being
developed by the Company. Subcontractors are employed by the Company for most of
the major construction components of a new hotel, including electrical and
mechanical work. The Company intends to continue to build hotels for others. The
Company believes that its construction experience and its relationship with many
subcontractors will facilitate the effective development of additional hotels.

            The Company devotes significant resources to the identification and
evaluation of potential sites for hotels. In the past, the Company has generally
targeted mid-sized to larger metropolitan markets for locating Sumner Suites
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


                                      -4-
<PAGE>

Company's franchisees focus on sites for their Shoney's 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.

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 chain 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 property 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.

            Programs designed to target the primary markets of business
travelers and mature leisure travelers provide brand recognition. All Shoney's
Inns participate in the Sho Business frequent business traveler program
entitling members to receive the lowest available corporate rate as well as
express check-in upon presentation of their membership card.

            Additionally the Company attempts to capitalize on the Shoney's
brand name recognition in the over 50-age group with two programs designed for
mature travelers. As an approved "Preferred Provider" of AARP, all Shoney's Inns
provide members of AARP with a 15% discount off the standard room rate at all
times. Our "Any Senior" program provides a 10% discount on the standard room
rate to any traveler age 55 or older.

            Shoney's Inns are promoted to the group tour market through the
annual publication of the Group Tour Guide, annual participation in three major
tour operator marketplaces and by direct mail. In addition, InnLink provides a
Group Tour Specialist to assist tour operators in contacting and booking
Shoney's Inns. The non-professional group planner is targeted through
advertisements in publications such as Reunions Magazine and through
participation in travel shows targeting the non-professional planner.


                                      -5-
<PAGE>

            The Company annually publishes a Shoney's Inn 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 Shoney's
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 a comprehensive on line directory with
reservations booking capabilities at www.shoneysinn.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 Shoney's 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 Shoney's Inn
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.

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 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 for Shoney's
Inns. 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. The Company believes that approximately 11% of room
sales for Shoney's Inns are made through InnLink.

            Quality Control. To ensure quality and consistency, the Company
regularly inspects each of its company owned and/or operated hotels and each
Shoney's Inn in the


                                      -6-
<PAGE>

Shoney's Inn system for compliance with facility and service standards.
Generally, in addition to its ongoing refurbishment activities, the Company
fully renovates each of the Company-owned Shoney's 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 Shoney's Inn franchise
principally to existing Shoney's Inn franchisees, other hotel brand developers
and other prospects known through management's contacts in the lodging industry.
The Company employs one full-time licensed franchise salesman. The Company also
markets franchises through advertisements in trade publications and
participation in trade shows and franchising conventions.

            Management believes that the Company attracts potential new
franchisees by 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 Shoney's Inn 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 20-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 Shoney's Inn franchise arrangement offered to
prospective franchisees, the franchisee pays monthly royalties of 3.5% of the
licensed hotel's gross sales during the term of the license agreement.
Additionally, a marketing cooperative fee of 1% of gross sales and a fee for
participation in the Shoney's Inn central reservation system of 1% of gross
sales are charged.

            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 Shoney's Inn
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 a Shoney's Inn is constructed, the Company requires the
franchisee to send the site general manager to a management training class
conducted by the Company


                                      -7-
<PAGE>

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 Shoney's 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 Shoney's Inns 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 Shoney's Inn
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.

LICENSE AGREEMENT WITH SHONEY'S

            Under the License Agreement with Shoney's, Inc., the Company acts as
exclusive franchisor of Shoney's Inns and has certain rights to use and to
license the use of the service marks "Shoney's Inn" and "Shoney's Inn & Suites"
in connection with lodging operations. Under the License Agreement, Shoney's
retains certain rights, including the right to approve the styles, shapes,
colors and forms in which the "Shoney's Inn" and "Shoney's Inn & Suites" marks
are displayed, the nature and extent of on-site food and beverage service and
the terms of franchise agreements (other than the maximum fees and other
financial terms). Further, Shoney's retains the right to terminate the License
Agreement under limited circumstances, including the bankruptcy of the Company,
the failure to comply with the terms of the License Agreement and the failure to
desist from conduct likely to impair Shoney's goodwill and reputation.

            Prior to October 25, 1996, the License Agreement entitled Shoney's
to receive a portion of the franchise fees collected by the Company. Shoney's
right to receive such fees was terminated on October 25, 1996.

LODGING INDUSTRY

            Smith Travel Research divides lodging chains into various segments
based on price. Shoney's Inns are included in the economy segment. Sumner Suites
were included in the mid-scale (without food and beverage) segment.

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

<TABLE>
<CAPTION>

                                                                            AVERAGE                      AVERAGE DAILY
                                              REVPAR                     OCCUPANCY RATE                  ROOM RATE (1)
                                              ------                     --------------                  -------------
                                    1999       2000       2001      1999      2000      2001       1999       2000       2001
                                   ------     ------     ------     ----      ----      ----      ------     ------     ------
<S>                                <C>        <C>        <C>        <C>       <C>       <C>       <C>        <C>        <C>
Industry-wide                      $51.42     $54.13     $50.99     63.3%     63.5%     60.1%     $81.27     $85.24     $84.85
Economy segment                     28.77      30.68      30.47     58.1      58.5      56.2       49.52      52.44      54.22
Mid-scale (w/o food and
  beverage) segment                 41.81      43.76      42.78     65.1      65.0      62.3       64.22      67.32      68.67
All Shoney's Inns                   27.23      25.32      24.56     54.1      50.6      49.9       50.36      50.00      49.26
Company-owned Shoney's
  Inns                              24.24      23.41      24.88     48.3      46.5      48.9       50.13      50.31      50.89
All Sumner Suites (2)               43.63      47.76        N/A     56.3      61.8       N/A       77.54      77.32        N/A

</TABLE>


                                      -8-
<PAGE>

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

(2)      Year 2000 represents only the first 28 weeks of the fiscal year to the
         date of sale of the leasehold interests to Prime. No Sumner Suites were
         operated in 2001.

Source:  Smith Travel Research, Standard Historical Trend Report for years ended
         1999, 2000 and 2001, for industry wide, economy, and mid-scale (w/o
         food and beverage), and the Company's internal data for all Shoney's
         Inns and Sumner Suites statistics.

COMPETITION

            The lodging industry is highly competitive. In franchising the
Shoney's Inn system 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 Shoney's Inns
includes lodging chains such as Holiday Inn Express, La Quinta, Comfort Inns,
Drury Inns, Fairfield Inns and Travelodge. The Company's Sumner Suites hotels
experienced competition from chains such as Embassy Suites, Residence Inn,
Courtyard by Marriott, Quality Suites, AmeriSuites, Comfort Suites, and
Springhill Suites. 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 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.


                                      -9-
<PAGE>

            The Americans with Disabilities Act (the "ADA") prohibits
discrimination on the basis of disability in public accommodations and
employment. The ADA became effective as to public accommodations in January 1992
and as to employment in July 1992. 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 has the right to use the "Shoney's Inn" and "Shoney's
Inn & Suites" service marks in its lodging operations under its License
Agreement with Shoney's (See "License Agreement with Shoney's" above). The
"Shoney's Inn" and "Shoney's Inn & Suites" marks may not be used in certain
limited areas in southern and western Virginia and in northeastern Tennessee;
however, the Company does not believe that these limitations are material to its
present business or its expansion strategy. The Company believes that its
ability to use the Shoney's marks 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 "Sumner Suites" 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 30, 2001 the Company had approximately 550 employees,
including approximately 140 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.

            Eleven of the twelve Company-owned Shoney's Inns, the three
AmeriSuites hotels


                                      -10-
<PAGE>

leased to another hotel operator, and the Company-owned Baymont Inn & Suites are
located on sites owned by the Company either directly or through subsidiaries.
The remaining Shoney's Inn is located on a site that is leased pursuant to a
long-term lease involving both the land and improvements.

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.

            On June 25, 2001 the Company filed an arbitration proceeding against
Prime Hospitality Corporation ("Prime") based on Prime's failure to commence use
of the Company's reservation services for a fee as agreed by Prime in an
Agreement for Reservation Services dated July 9, 2000. The Company is seeking
$20 million in monetary damages. The parties have selected an arbitrator, and
the arbitration hearing has been scheduled to begin on April 15, 2002. There is
no assurance that the Company will be successful in the proceeding.

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
2001.


                                      -11-
<PAGE>

                                     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.

<TABLE>
<CAPTION>

             FISCAL 2000                            HIGH            LOW
             -----------                            ----            ---
<S>                                                 <C>             <C>
First Quarter                                       5.13            3.47
Second Quarter                                      4.25            3.00
Third Quarter                                       5.69            3.25
Fourth Quarter                                      6.00            4.63

<CAPTION>

             FISCAL 2001                            HIGH            LOW
             -----------                            ----            ---
<S>                                                 <C>             <C>
First Quarter                                       5.38            4.63
Second Quarter                                      5.78            4.75
Third Quarter                                       6.25            3.83
Fourth Quarter                                      6.00            3.83

<CAPTION>

             FISCAL 2002                            HIGH            LOW
             -----------                            ----            ---
<S>                                                 <C>             <C>
First Quarter (through March 21, 2002)              6.00            5.70

</TABLE>


            On March 21, 2002, the last reported sale price for the Company's
Common Stock as reported by NASDAQ was $5.75 per share. As of March 21, 2002,
there were approximately 48 holders of record of the Company's Common Stock and
approximately 650 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 30, 2001 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 30, 2001, 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.


                                      -12-
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                  FISCAL YEAR ENDED
                                                         DEC.28,         DEC.27,         DEC.26,         DEC.31,         DEC.30,
                                                          1997            1998            1999            2000            2001
                                                       ----------      ----------      ----------      ----------      ----------
<S>                                                    <C>             <C>             <C>             <C>             <C>
REVENUES:
   Hotel                                               $   71,945      $   69,240      $   66,188      $   46,431      $   13,677
   Franchising and management                               3,164           3,119           4,152           3,606           3,971
   Construction and development                                --              81          11,234          12,037          27,480
   Rent                                                       442             532             483           1,955           3,468
   Other income                                               395              30             360              49             337
                                                       ----------      ----------      ----------      ----------      ----------
                  Total revenues                           75,946          73,002          82,417          64,078          48,933
COSTS AND EXPENSES:
   Hotel                                                   42,988          44,934          46,282          34,485          11,015
   Franchising and management                               2,301           2,393           2,420           2,460           2,192
   Construction and development                                --              71           9,826          12,571          25,692
   Rent expense                                             1,991           9,838          13,530          10,333             582
   General and administrative                               3,953           6,358           6,342           5,019           5,927
   Depreciation and amortization                           10,376           8,012           7,101           5,786           4,661
                                                       ----------      ----------      ----------      ----------      ----------
                  Total expenses                           61,609          71,606          85,501          70,654          50,069
                                                       ----------      ----------      ----------      ----------      ----------

Operating earnings (loss)                                  14,337           1,396          (3,084)         (6,576)         (1,136)
                                                       ----------      ----------      ----------      ----------      ----------

   Gain on sale of property and

     leasehold interests                                    3,819          20,511          15,002           4,901           3,762
   Interest expense                                       (11,298)        (10,415)        (12,136)        (10,486)         (8,454)
   Interest income                                          1,762           4,949           6,182           6,464           6,377
                                                       ----------      ----------      ----------      ----------      ----------

Earnings (loss) before income taxes,
   minority interests, and
   extraordinary items                                      8,620          16,441           5,964          (5,697)            549
Income taxes                                               (2,259)         (6,581)         (1,909)          1,777            (145)
Minority interests in earnings of
   consolidated subsidiaries &
   partnerships                                              (173)           (647)         (1,910)            (57)            (58)
                                                       ----------      ----------      ----------      ----------      ----------

Earnings (loss) from continuing operations
   before extraordinary items and
   cumulative effect of change in
   accounting policy                                        6,188           9,213           2,145          (3,977)            346
Discontinued operations:
   Gain on disposal of discontinued
   business segment, net of income
   tax effect                                                 526              --              --              --              --
Extraordinary gains (losses), net of
   income tax benefit                                        (186)         (1,067)          2,394           4,555             566
Cumulative effect of change in
   accounting policy, net of income
   tax effect                                              (1,164)             --              --              --              --
                                                       ----------      ----------      ----------      ----------      ----------
Net earnings                                           $    5,364      $    8,146      $    4,539      $      578      $      912
                                                       ==========      ==========      ==========      ==========      ==========

</TABLE>


                                      -13-
<PAGE>

<TABLE>
<S>                                                    <C>         <C>            <C>          <C>            <C>
Earnings per common share Basic:
   Earnings (loss) from continuing
     operations before extraordinary
     items and cumulative effect of
     change in accounting policy                       $  0.75     $    1.12      $   0.33     $   (0.73)     $    0.06
                                                       =======     =========      ========     =========      =========
        Net Earnings                                   $  0.65     $    0.99      $   0.70     $    0.11      $    0.16
                                                       =======     =========      ========     =========      =========
  Diluted:
   Earnings (loss) from continuing
     operations before extraordinary items and
     cumulative effect of a change in accounting
     policy                                            $  0.74     $    1.07      $   0.32     $   (0.72)     $    0.06
                                                       =======     =========      ========     =========      =========
        Net Earnings                                   $  0.64     $    0.95      $   0.67     $    0.10      $    0.16
                                                       =======     =========      ========     =========      =========
Weighted average common  shares
  outstanding
        Basic                                            8,245         8,191         6,518         5,472          5,465
                                                       =======     =========      ========     =========      =========
        Diluted                                          8.245         8,611         6,745         5,554          5,530
                                                       =======     =========      ========     =========      =========
Balance sheet data:

   Working capital                                     $54,120     $ (19,109)     $ 12,655     $   7,964      $  (3,369)
   Total assets                                        299,877       295,001       270,314       204,631        206,587
   Long-term debt and capitalized
      leases                                           154,638       128,946       125,551        94,169         89,701
   Shareholders' equity                                 95,352        98,099        90,878        90,322         89,273

</TABLE>


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

OVERVIEW

            The Company derives revenue primarily from hotel room sales at its
Sumner Suites hotels (through July 9, 2000) and Company-owned Shoney's Inn
hotels. The Company also receives management fees for services it performs for
eighteen franchised Shoney's Inns. The Company derives additional revenue from
franchise fees it receives as the exclusive franchiser of Shoney's Inns.

            The Company's hotel operations have been supplemented by contract
revenues from construction and development of hotels for third 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's hotel operations have historically been seasonal in
nature, reflecting higher occupancy rates during spring and summer months, which
may be 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.


                                      -14-

<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended
                                                              -------------------------------------------------
                                                              Dec.26,                Dec.31,            Dec.30,
                                                               1999                   2000               2001
                                                               ----                   ----               ----
<S>                                                           <C>                    <C>                <C>
Revenues:
   Hotel                                                       80.3%                  72.5%              28.0%
   Franchising and management                                   5.0%                   5.6%               8.1%
   Construction and development                                13.6%                  18.8%              56.1%
   Rent income                                                  0.6%                   3.1%               7.1%
   Other income                                                 0.4%                   0.1%               0.7%
                                                                ----                   ----               ----
               Total revenues                                  100.0%                 100.0%             100.0%
                                                              ------                 ------             ------
Costs and expenses:
   Hotel                                                       56.2%                  53.8%              22.5%
   Franchising and management                                   2.9%                   3.8%               4.5%
   Construction and development                                11.9%                  19.6%              52.5%
   Rent expense, net                                           16.4%                  16.1%               1.2%
   General and administrative                                   7.7%                   7.8%              12.1%
   Depreciation and amortization                                8.6%                   9.0%               9.5%
                                                                ----                   ----               ----
               Total expenses                                  103.7%                 110.3%             102.3%
                                                              ------                 ------             ------
Operating (loss)                                               (3.7)%                (10.3)%             (2.3)%
                                                                ----                   ----               ----
   Gain on sale of property                                    18.2%                   7.6%               7.7%
   Interest expense                                           (14.7)%                (16.4)%            (17.3)%
   Interest income                                              7.5%                  10.1%              13.0%
                                                                ----                   ----               ----
 Earnings (loss) before income
   taxes, minority interests and
   extraordinary items                                          7.2%                  (8.9)%              1.1%
Income taxes                                                   (2.3)%                  2.8%              (0.3)%
Minority interests in earnings of
   consolidated subsidiaries and
   partnerships                                                (2.3)%                 (0.1)%             (0.1)%
                                                                ----                   ----               ----
Earnings before extraordinary items                             2.6%                  (6.2)%              0.7%
Extraordinary gains, net of    income tax benefit               2.9%                   7.1%               1.2%
                                                                ----                   ----               ----
Net earnings                                                    5.5%                   0.9%               1.9%
                                                                ====                   ====               ====
</TABLE>

FOR THE FISCAL YEARS ENDED DECEMBER 30, 2001 AND DECEMBER 31, 2000

         For the fiscal year ended December 30, 2001, total revenues decreased
23.6% to $48.9 million from $64.1 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


                                     - 15 -
<PAGE>

2000 and during fiscal 2001. The Company owned and operated one AmeriSuites
hotel and one Baymont Inn & Suites beginning in late 2001. Revenues from hotel
operations in fiscal 2001 decreased by 70.5% to $13.7 million from $46.4 million
for fiscal year 2000. For the 12 hotels opened for all of both years (same
hotels), average daily room rates in 2001 decreased 0.7% to $51.17 from $51.51
in 2000, and average occupancy rates increased from 44.5% in 2000 to 48.5% in
2001, resulting in an increase in same hotel revenues per available room
(RevPAR) of 8.4%, from $22.90 in 2000 to $24.83 in 2001. RevPAR for all
Company-owned Shoney's Inns increased by 6.3% in 2001 from 2000, from $23.41 to
$24.88. The increases in the Shoney's Inns RevPAR were due primarily to the
improved economic conditions in the Houston, Texas, market area where five of
the Company-owned Shoney's Inns are located. The remaining (non-same) hotels
contributed $1.0 million to hotel revenues in 2001 compared with $34.7 million
in 2000. The $1.0 million revenues from non-same hotels in 2001 was from two
hotels in which the Company sold its interests in the first quarter of 2001, one
new hotel which opened in the third quarter of 2001, and one hotel which was
acquired in the fourth quarter of 2001. The $34.7 million revenues from non-same
hotels in 2000 was 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 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 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 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 $23.5 million, or
68.1%, to $11.0 million from $34.5 million in 2000. The sale of the Company's
interest in one Shoney's Inn and all 27 of its Sumner Suites hotels in second
quarter 2000 and the sale of


                                     - 16 -
<PAGE>

two Shoney's Inns in the first quarter of 2001 accounted for a decrease of $24.2
million in hotel operating expenses from 2000 to 2001. Hotel operating expenses
on the two hotels added in late 2001 were $230,000. Hotel operating expenses on
the 12 same-hotels increased by $514,000, or 5.3%, in 2001 over 2000. The
operating expenses as a percentage of operating revenues for this activity
increased from 74.3% in 2000 to 80.5% in 2001. Operating expenses as a
percentage of operating revenues on the 12 same-hotels decreased from 82.9% to
81.0% 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 and management 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, (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 $909,000, or 18.1%,
from 2000 to 2001. The increase was due primarily to increased insurance costs,
professional fees, and travel expenses.

         Depreciation and amortization expenses decreased by $1,125,000, or
19.4%, 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 and acquired one hotel in November 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


                                     - 17 -
<PAGE>

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.

         Interest expense decreased by $2.0 million, while interest income
decreased by $86,000 from 2000 to 2001, for a total decrease of $2.1 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 paydown 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 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 extraordinary 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.

FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999

         For the fiscal year ended December 31, 2000, total revenues decreased
22.3% to $64.1 million from $82.4 million for the fiscal year ended December 26,
1999.

         The Company owned and operated two hotel brands - Sumner Suites and
Shoney's Inns. Revenues from hotel operations in fiscal 2000 decreased by 29.9%
to $46.4 million from $66.2 million for fiscal year 1999. For the 14 hotels
opened for all of both years (same hotels), average daily room rates in 2000
decreased 0.2% to $50.43 from $50.55 in 1999, and average occupancy rates
decreased from 47.9% in 1999 to 46.6% in 2000, resulting in a decrease in same
hotel revenues per available room (RevPAR) of 2.9%, from $24.22 in 1999 to
$23.52 in 2000. RevPAR for all Company-owned Shoney's Inns declined by 3.4% in
2000 from 1999, from $24.24 to $23.41. The decreases in the Shoney's Inns RevPAR
were due primarily to increased competition from new hotels. The remaining
(non-same) hotels contributed $32.1 million to hotel revenues in 2000 compared
with $51.8 million in 1999. The $32.1 million revenues from non-same hotels in
2000 was from 28 hotels in which the Company sold its interests in the second
quarter of 2000. The $51.8 million revenues from non-same hotels in 1999 was
from 24 of those 28 hotels which were open for all of 1999 and 4 of them which
opened during the year 1999. The 27 Sumner Suites hotels' RevPAR increased by
9.5% in 2000 over 1999, from $43.63 to $47.76.


                                     - 18 -
<PAGE>

         Franchising and management revenues in fiscal 2000 decreased by 13.1%
from 1999, to $3.6 million in 2000 from $4.2 million in 1999. A settlement
agreement entered into between the Company and an ex-franchisee whereby the
ex-franchisee agreed to pay the Company $575,000 in cash and $200,000 each year
for the next three years, resulted in the recognition of $1.2 million in
franchising revenues in 1999. In fiscal 1999 and 2000, other termination fees
totaled $13,000 and $560,000, respectively. Exclusive of these non-recurring
franchise revenues, the remaining franchising and management revenues increased
by $70,000, or 2.3%, from 1999 to 2000. At the end of fiscal 2000 there were 59
franchised Shoney's Inns in operation compared with 61 at the end of fiscal
1999; this decrease was due to seven terminations compared with five additions
during 2000. As of December 31, 2000, there were no franchised Shoney's Inns
under construction.

         Revenues from construction and development activities in 2000 were
$12.0 million compared with $11.2 million in fiscal 1999. The 2000 revenues
earned were primarily from three hotel construction contracts being performed
for third parties, two of which were still in progress at year-end, while 1999
revenues earned were from three hotel construction contracts being performed for
third parties, one of which was 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 $2.0 million in 2000, compared with $483,000 in 1999.
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 decreased by $311,000, or 86.4%, in 2000
from 1999. 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 2000 decreased by $11.8 million, or
25.5%, to $34.5 million from $46.3 million in 1999. The sale of the Company's
interest in one Shoney's Inn and all 27 of its Sumner Suites hotels in second
quarter 2000 accounted for a decrease of $12.2 million in hotel operating
expenses from 1999 to 2000. Hotel operating expenses on the 14 same-hotels
increased by $433,000, or 3.9%, in 2000 over 1999. The operating expenses as a
percentage of operating revenues for this activity increased from 69.9% in 1999
to 74.3% in 2000. Operating expenses as a percentage of operating revenues on
the 14 same hotels increased from 76.4% to 79.8% from 1999 to 2000. Increases in
hotel operating expenses on same hotels were primarily in the areas of
payroll-related costs and regional general and administrative expenses.

         Franchising and management operating expenses increased by $40,000, or
1.7%, from 1999 to 2000. Construction and development costs in 2000 were $12.6
million compared with $9.8 million in 1998. The costs incurred were directly
related to the revenues earned from the three third party construction contracts
in each of the two years, one of which was still in progress at year-end 1999
and two of which were still in progress at year-end 2000.

         Rent expense decreased by $3.2 million, or 23.6%, in 2000 from 1999.
The decrease was due to (1) the Company's sale of its leasehold interest in 24
of its


                                     - 19 -
<PAGE>

Sumner Suites hotels on July 9, 2000, which had previously been sold and
leased back, (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 31, 2000, the Company was obligated on only one hotel lease; in 2000,
rent expense on this lease was $625,000.

         General and administrative expenses declined by $1.3 million, or 20.9%,
from 1999 to 2000. Excluding expensing of pre-development costs for sites no
longer deemed probable of development in the amount of $623,000 in 1999, general
and administrative expenses declined by $700,000, or 12.2%, from 1999 to 2000.
This was due primarily to reductions in general and administrative expenses made
possible by the Company's sale of its interests in 28 hotels in mid-2000.

         Depreciation and amortization expenses decreased by $1.3 million, or
18.5%, from 1999 to 2000. 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. The Company opened no new Company-owned hotels in 2000, and
none were under construction at the end of the year.

         Interest expense decreased by $1.7 million, while interest income
increased by $281,000 from 1999 to 2000, for a 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 $42.4 million of the Company's outstanding subordinated debt in the open
market and in privately negotiated transactions beginning October 1, 1999 and
continuing through 2000. The increase in interest income in 2000 over 1999 was
due primarily to interest earned at a higher interest rate on mortgage notes
receivable from the sale of 16 hotels in third quarter 1998, and to interest
earned on the seller-financed portion of the proceeds of the sale of one hotel
in June 2000.

         The gain recognized on the sale of property in 2000 was $4.9 million
compared with $15.0 million in 1999. 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. $11.9 million of the $15.0 million recognized in 1999
was due to the recognition of previously deferred gains related to four of the
16 hotels sold in 1998, which was being recognized on the installment method of
accounting. The other $3.1 million was from the sale in 1999 of land held for
resale.

         Minority interests in earnings of consolidated subsidiaries and
partnerships decreased by $1.9 million from 1999 to 2000. The 1999 minority
interests included $1.8 million which represented the 40% minority interest in
$4.6 million of the gain on sale of property in 1998 which was recognized in
1999.


                                     - 20 -
<PAGE>

         The extraordinary gains from early extinguishments of debt in 2000 and
1999 were the result of the repurchase of $29.8 million and $12.6 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.

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, 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 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 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. In the event the fair values of the underlying
assets were to be less than the balances of the first mortgage notes (which are
cross-defaulted and cross-collateralized), the notes receivable could be
under-collateralized.

         Percentage of Completion Accounting for Construction Contracts:
Construction and development revenues earned on fixed price contracts are
recognized based upon the


                                     - 21 -
<PAGE>

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.

         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.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's cash flows provided by operating activities were $8.0
million in 2001, compared with cash flows used in operating activities of $1.2
million in 2000 and $22.6 million in 1999. Earnings (losses) before
extraordinary items were $346,000 in 2001, $(4.0) million in 2000, and $2.1
million in 1999. Depreciation and amortization was $4.7 million, $5.8 million,
and $7.1 million in 2001, 2000, and 1999, respectively, the declines each year
being the result of the sale of properties in 1999, 2000, and 2001, in excess of
new properties being opened during these years. The Company recognized $3.8
million, $4.9 million, and $15.0 million from gains on sale of property during
2001, 2000 and 1999, respectively, of which $299,000 and $11.9 million during
2000 and 1999, respectively, was from the sale of 16 lodging facilities in 1998,
a portion of which was deferred under the installment method of accounting. 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 remaining $4.6 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 $1.9 million cash provided by minority interests in earnings of
consolidated subsidiaries and partnerships in 1999 included $1.8 million from
one partnership which sold one of the 16 lodging facilities in 1998 upon which
the deferred gain was recognized in 1999 in the amount of $4.6 million. The
construction contracts receivable and estimated earnings in excess of billings
on construction contracts increased by $4.6 million in 2001 compared with a
decrease of $8.8 million in 2000 and an increase of $11.2 million in 1999; the
decrease in 2000 was due to two construction contracts for third parties in
1999, which were completed in late 1999 and in 2000, which were not billable
until the projects were completed. Increases in accounts payable and accrued
expenses provided $6.7 million cash in 2001 as compared with cash used of $5.4
million and $1.8 million in 2000 and 1999, respectively. An increase in accounts
receivable of $926,000 and $1.6 million in 2001 and 1999, respectively,
contrasts to a decrease in accounts receivable of $2.2


                                     - 22 -
<PAGE>

million in 2000. The changes in accounts receivable 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 used in investing activities were $4.7 million
in 2001, as compared with cash flows provided by investing activities of $28.6
million in 2000 and $54.9 million in 1999. The Company collected $12.3 million
from notes receivable in 1999, of which $12.2 million related to two hotel
properties sold in 1997 and 1998. Proceeds from the sale of property and
leasehold interests were $2.9 million, $53.5 million, and $70.9 million in 2001,
2000, and 1999, respectively. These amounts in 2000 and 1999 include the net
proceeds from the sale/leaseback of four hotels in 2000 and six hotels in 1999.
In addition to the sale/leaseback transactions in 1999 and 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 significant increase in restricted cash in
2000 was the result of $14.2 million escrowed for the construction of two hotels
subject to a swap option related to the transfer of the Company's leasehold
interest in 24 hotels in July 2000. The construction of these two hotels used
$12.4 of the escrowed funds, reducing the restricted cash accordingly. One of
the two hotels opened in October of 2001 and the other one opened in early 2002.
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 $20.9
million, $8.8 million, and $20.1 million in 2001, 2000, and 1999, respectively.

         Net cash used in financing activities was $6.0 million in 2001,
compared with $25.4 million in 2000 and $31.4 million in 1999. In 1999, the
Company repurchased 2.1 million shares of its common stock for $11.8 million
pursuant to a plan to repurchase up to $12.5 million of the Company's
outstanding common stock. In July of 1999 the Company increased the 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 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, and repurchased $4.0 million of this debt
for $2.5 million in 1999. 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 $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 1999, the Company repurchased $8.6 million of these debt securities at a cost
of $5.8 million, and in 2000, the Company repurchased an additional $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


                                     - 23 -
<PAGE>

October 3, 2001, which, among other changes, extended the maturity to September
30, 2004. 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. 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, or (c) $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 30, 2001, the Company had $13 million in borrowings outstanding under
this credit facility, consisting of the $10 million term loan and $3 million on
the revolving line of credit.

         The Company also maintains a $1 million unsecured line of credit with
another bank, bearing interest at the lender's prime rate, maturing May 31,
2002. As of December 30, 2001, the Company had no borrowings outstanding under
this credit facility.

         As of the end of 2001, one hotel was under construction. The funds
required to complete the construction and furnishing of this hotel were held in
escrow at the end of 2001. The Company has acquired two sites for future
development and expects to develop hotels for third parties on these sites,
requiring no Company funds to complete the development of these sites. In 2000,
the Company sold its interests in all of its Sumner Suites hotels, and has no
plans to develop additional Sumner Suites hotels in the immediate future.

         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 $3.1 million, $2.9 million, and $3.0 million of these notes
were redeemed under this provision on December 1, 2001, December 1, 2000 and
December 1, 1999, respectively.

         The Company is investigating various alternatives to maximize
shareholder value. These alternatives could include, without limitation, the
franchising and operation of additional Shoney's Inns, a sale of the remaining
Shoney's Inns, 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.
The Company believes that a combination of existing cash, the collection of
notes receivable, net cash provided by operations, and borrowings under existing
credit facilities or mortgage debt, will be sufficient to fund its scheduled
hotel development, stock repurchase plan, debt repayments and operations for at
least the next twelve months.


                                     - 24 -
<PAGE>

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

         The Company will apply the new rules on accounting for goodwill and
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of SFAS No. 142 is expected to result in an increase
in net income of approximately $263,000 ($0.05 per share) per year. During 2002,
the Company will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002, and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.

         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 and had no material effect on the Company's results of operations or
financial position.

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.

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

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


                                     - 25 -
<PAGE>

         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 $605,000 based on the balances of these variable-rate notes
receivable at December 30, 2001. 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 $179,000 based
on the balances of variable-rate long-term debt at December 30, 2001.

         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; therefore, a hypothetical change in
interest rates would not necessarily impact the fair value of the Company's
fixed rate debt.

         There were no significant changes in the Company's market risk in the
fiscal year ended December 30, 2001, 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 at the end 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.


                                     - 26 -
<PAGE>

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.


                                     - 27 -
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>
                                                                                                               PAGE
<S>     <C>                                                                                                  <C>
(a)      1.       Financial Statements:

                  The following Financial Statements are included herein:

                  Independent Auditors' Report                                                                       F-1

                  Consolidated Balance Sheets at December 30, 2001 and
                    December 31, 2000                                                                          F-2 - F-3

                  Consolidated Statements of Earnings for each of the
                    three years in the period ended December 30, 2001                                          F-4 - F-5

                  Consolidated Statements of Shareholders' Equity
                   and Comprehensive Earnings for each of the three years
                   in the period ended December 30, 2001                                                       F-6 - F-7

                  Consolidated Statements of Cash Flows for each of the
                    three years in the period ended December 30, 2001                                          F-8 - F-9

                  Notes to consolidated financial statements                                                 F-10 - F-33

         2.       Financial Statement Schedules:
                  Independent Auditors' Report                                                                       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(14) -- 1991 Stock Option Plan
                  10(15) -- First Amendment to 1991 Stock Option Plan
                  10(16) -- Second Amendment to 1991 Stock Option Plan
                  10(17) -- Key Employee Supplemental Income Plan
</TABLE>


                                     - 28 -
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                EXHIBIT
-----------------------------------------------------------------------------------------------------------------------
<S>           <C>     <C>
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
                      71/2Convertible 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
</TABLE>

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.


                                     - 29 -
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                EXHIBIT
-----------------------------------------------------------------------------------------------------------------------
<S>           <C>     <C>
   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
</TABLE>


                                     - 30 -
<PAGE>

<TABLE>
<S>           <C>     <C>
   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., a 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.*

     10(16)   --     Sale and Purchase Agreement between ShoLodge, Inc. and Prime Hospitality Corp.,
                     dated as of March 16, 2000. Incorporated by reference to the Company's Annual
                     Report on Form 10-K filed with the Commission on March 27, 2000.

     10(17)   --     First Amendment to Sale and Purchase Agreement by and between ShoLodge, Inc. and
                     Prime Hospitality Corp., 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)  --     Purchase and Sale Agreement by and between ShoLodge, Inc. and certain of its
                     Affiliates, as Sellers, and HPT Suite Properties Trust, as Purchaser, dated May
                     11, 2000. Incorporated by reference to the Company's Current Report on Form 8-K
                     filed with the Commission on May 26, 2000.

    10(19)    --     Agreement to Lease between HPT Suite Properties Trust and Suite Tenant, Inc.,
                     dated May 11, 2000. Incorporated by reference to the Company's Current Report on
                     Form 8-K filed with the Commission on May 26, 2000.

     10(20)   --     Fourth Amendment to Lease Agreement and Amendment to Incidental Documents
                     entered into between Hospitality Properties Trust, HPT Suite Properties Trust,
                     ShoLodge, Inc and Suite Tenant, Inc., dated May 11, 2000. Incorporated by
                     reference to the Company's Current Report on Form 8-K filed with the Commission
                     on May 26, 2000.

      10(21)  --     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(22)  --     Contractor and Development Agreement by and between Prime Hospitality Corp., as
                     owner, Moore & Associates, Inc., as contractor, and ShoLodge, Inc., as
                     guarantor, 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.
</TABLE>


                                     - 31 -
<PAGE>

<TABLE>
<S>           <C>     <C>
   10(23)     --     Interim Agreement for Reservation Services by and between ShoLodge, Inc., and
                     Prime Hospitality Corp. 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(24)   --     Agreement for Reservation Services by and between ShoLodge, Inc. and Prime
                     Hospitality Corp., 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(25)    --     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.

    21        --     Subsidiaries of the Registrant*

    23(1)     --     Consent of Ernst & Young LLP*
</TABLE>


* Filed herewith

(b)      No reports on Form 8-K were filed during the fourth quarter ended
         December 30, 2001.

(c)      Exhibits required by Item 601 of Regulation S-K are listed above.

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


                                     - 32 -
<PAGE>

                                   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: March 29, 2002                   /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.

<TABLE>
<CAPTION>
SIGNATURE                               TITLE                                                            DATE
-------------------------------------------------------------------------------------------------------------
<S>                                     <C>                                                              <C>



/s/ Leon Moore                          President, Chief Executive                                        March 29, 2002
------------------------                Officer, Principal Executive
Leon Moore                              Officer, Director




/s/ Bob Marlowe                         Secretary, Treasurer, Chief                                       March 29, 2002
------------------------                Financial Officer, Chief
Bob Marlowe                             Accounting Officer, Principal
                                        Accounting Officer, Director




/s/ Richard L. Johnson                  Executive Vice President,                                         March 29, 2002
------------------------                Director
Richard L. Johnson



/s/ Earl H. Sadler                      Director                                                          March 29, 2002
------------------------
Earl H. Sadler



/s/ Helen L. Moskovitz                  Director                                                          March 29, 2002
------------------------
Helen L. Moskovitz



 /s/ David M. Resha                     Director                                                          March 29, 2002
------------------------
David M. Resha
</TABLE>


                                     - 33 -
<PAGE>
                         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 30, 2001 and December 31, 2000 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 30, 2001. Our audits also
included the financial statement schedule listed in the index at Item 14(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 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 30, 2001 and December 31, 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 30, 2001, 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.



                                                       /s/ Ernst & Young LLP

Nashville, Tennessee
March 22, 2002


                                      F-1
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                             DECEMBER 30,            December 31,
                                                                2001                    2000
                                                            -------------------------------------
<S>                                                         <C>                     <C>
ASSETS
Current assets:
   Cash and cash equivalents                                $   2,704,161           $   5,339,689
   Restricted cash                                                200,000                 200,000
   Accounts receivable :
     Trade, net of allowance for doubtful accounts
       of $184,404 and $380,314 for 2001 and
       2000, respectively                                       3,557,591               2,631,494
     Construction contracts                                     4,016,502               2,405,629
     Costs and estimated earnings in excess of
        billings on construction contracts                      3,063,747                  42,844
   Income taxes receivable                                             --               4,750,074
   Prepaid expenses                                               365,849                 311,513
   Notes receivable, net                                        1,728,340                 909,656
   Other current assets                                           153,766                 146,850
                                                            -------------------------------------
Total current assets                                           15,789,956              16,737,749

Notes receivable, net                                          68,227,306              63,044,920
Restricted cash                                                 1,781,747              14,193,534
Property and equipment                                        123,112,190             114,361,649
Less accumulated depreciation and amortization                (21,944,927)            (23,526,651)
                                                            -------------------------------------
                                                              101,167,263              90,834,998
Land under development or held for sale                         9,254,986               8,231,714
Deferred charges, net                                           6,111,825               6,721,247
Intangible assets, net                                          2,795,659               2,949,008
Other assets                                                    1,457,907               1,917,918
                                                            -------------------------------------
                                                            $ 206,586,649           $ 204,631,088
                                                            =====================================
</TABLE>


                                      F-2
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                     Consolidated Balance Sheets (continued)


<TABLE>
<CAPTION>
                                                                     DECEMBER 30,            December 31,
                                                                        2001                    2000
                                                                    -------------------------------------
<S>                                                                 <C>                     <C>
LIABILITIES
Current liabilities:
   Accounts payable and accrued expenses                            $  14,171,631           $   7,518,321
   Taxes payable other than on income                                     476,809                 384,352
   Income taxes payable                                                 3,859,873                      --
   Current portion of long-term debt                                      650,700                 870,636
                                                                    -------------------------------------
Total current liabilities                                              19,159,013               8,773,309

Long-term debt, less current portion                                   89,701,381              94,169,013
Deferred income taxes                                                     992,275               4,290,423
Deferred gain on sale/leaseback                                         4,129,962               4,129,962
Deferred credits                                                        2,545,004               2,218,519
Minority interests in equity of consolidated
   subsidiaries and partnerships                                          786,477                 728,222
                                                                    -------------------------------------
Total liabilities                                                     117,314,112             114,309,448

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, 5,088,278 and 5,544,211 shares issued
     and outstanding as of December 30, 2001
     and December 31, 2000, respectively)                                   1,000                   1,000
   Additional paid-in capital                                          23,519,506              25,425,175
   Retained earnings                                                   67,001,529              66,089,984
   Unrealized gain on securities available-for-sale,
     net of income taxes                                                  100,307                  53,231
   Notes receivable from officer, net of discount of
     $181,444 and $283,499 as of December 30, 2001
     and December 31, 2000, respectively                               (1,349,805)             (1,247,750)
                                                                    -------------------------------------

    Total shareholders' equity                                         89,272,537              90,321,640
                                                                    -------------------------------------
                                                                    $ 206,586,649           $ 204,631,088
                                                                    =====================================
</TABLE>

See accompanying notes.


                                      F-3
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                       Consolidated Statements of Earnings

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED
                                                            ----------------------------------------------------------
                                                             DECEMBER 30,          DECEMBER 31,           DECEMBER 26,
                                                               2001                   2000                   1999
                                                            ----------------------------------------------------------
<S>                                                         <C>                    <C>                    <C>
Revenues:
   Hotel                                                    $ 13,677,402           $ 46,430,544           $ 66,187,974
   Franchising and management                                  3,970,821              3,606,243              4,151,550
   Construction and development                               27,479,885             12,036,744             11,234,378
   Rent                                                        3,467,744              1,955,324                483,443
   Other income                                                  336,595                 48,982                359,604
                                                            ----------------------------------------------------------
       Total revenues                                         48,932,447             64,077,837             82,416,949

Cost and expenses:
    Hotel                                                     11,014,903             34,485,554             46,281,773
    Franchising and management                                 2,191,659              2,459,801              2,419,700
    Construction and development                              25,691,829             12,571,160              9,825,958
    Rent expense                                                 581,900             10,332,830             13,530,020
    General and administrative                                 5,927,641              5,018,981              6,342,439
    Depreciation and amortization                              4,660,937              5,785,790              7,100,525
                                                            ----------------------------------------------------------
        Total  expenses                                       50,068,869             70,654,116             85,500,415
                                                            ----------------------------------------------------------

Operating loss                                                (1,136,422)            (6,576,279)            (3,083,466)

Gain on sale of property and leasehold interests               3,761,890              4,901,523             15,001,716
Interest expense                                              (8,453,777)           (10,485,518)           (12,136,415)
Interest income                                                6,377,390              6,463,537              6,182,084
                                                            ----------------------------------------------------------
Earnings (loss) before income taxes, minority
   interests, and extraordinary items                            549,081             (5,696,737)             5,963,919
Income tax (expense) benefit                                    (145,000)             1,777,326             (1,909,000)
Minority interests in earnings of consolidated
   subsidiaries and partnerships                                 (58,255)               (57,246)            (1,909,605)
                                                            ----------------------------------------------------------
Earnings (loss) before extraordinary items                       345,826             (3,976,657)             2,145,314

Extraordinary gain on early extinguishments of
   debt, net of income taxes of $(347,000),
   $(2,752,326) and $(1,467,000) for 2001, 2000
   and 1999, respectively                                        565,719              4,554,319              2,393,512
                                                            ----------------------------------------------------------
Net earnings                                                $    911,545           $    577,662           $  4,538,826
                                                            ==========================================================
</TABLE>


                                      F-4
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                 Consolidated Statements of Earnings (continued)

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
                                                            -------------------------------------------------------------
                                                             DECEMBER 30,            DECEMBER 31,            DECEMBER 26,
                                                                2001                    2000                     1999
                                                            -------------------------------------------------------------
<S>                                                         <C>                     <C>                     <C>
Earnings per common share:
   Basic:
     Earnings (loss) before extraordinary items             $        0.06           $       (0.73)          $        0.33
     Extraordinary gain                                              0.10                    0.84                    0.37
                                                            -------------------------------------------------------------
       Net earnings                                         $        0.16           $        0.11           $        0.70
                                                            =============================================================

  Diluted:
     Earnings (loss) before extraordinary items             $        0.06           $       (0.72)          $        0.32
     Extraordinary gain                                              0.10                    0.82                    0.35
                                                            -------------------------------------------------------------
      Net earnings                                          $        0.16           $        0.10           $        0.67
                                                            =============================================================

Weighted average common shares outstanding:
   Basic                                                        5,464,533               5,471,962               6,517,717
                                                            =============================================================
   Diluted                                                      5,529,825               5,553,852               6,744,835
                                                            =============================================================
</TABLE>

See accompanying notes.


                                      F-5
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                Consolidated Statements of Shareholders' Equity

     Years ended December 30, 2001, December 31, 2000 and December 26, 1999


<TABLE>
<CAPTION>
                                                          COMMON STOCK                     NOTES                ADDITIONAL
                                                 ------------------------------       RECEIVABLE FROM            PAID-IN
                                                   SHARES              AMOUNT             OFFICER                 CAPITAL
                                                 --------------------------------------------------------------------------
<S>                                              <C>                   <C>            <C>                      <C>
Balance, December 27, 1998                         7,472,310           $  1,000          $        --           $ 37,056,834
   Exercise of stock options, net                     13,568                 --                   --                 50,880
   Net earnings                                           --                 --                   --                     --
   Change in unrealized gain on
     securities available-for-sale, net
     of income taxes                                      --                 --                   --                     --
   Comprehensive earnings
   Common stock repurchased                       (2,113,300)                --                   --            (11,823,018)
                                                 --------------------------------------------------------------------------
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
   NET EARNINGS                                           --                 --                   --                     --
   INTEREST ACCRETED ON NOTES
     RECEIVABLE FROM OFFICER FOR
     EXERCISE OF OPTIONS TO PURCHASE
     COMMON STOCK                                         --                 --             (102,055)                    --
   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
                                                 ==========================================================================
</TABLE>


                                      F-6
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                Consolidated Statements of Shareholders' Equity
                                  (continued)

     Years ended December 30, 2001, December 31, 2000 and December 26, 1999

<TABLE>
<CAPTION>
                                                                                   ACCUMULATED
                                                                                     OTHER
                                                              RETAINED            COMPREHENSIVE
                                                              EARNINGS                INCOME                 TOTAL
                                                            ----------------------------------------------------------
<S>                                                         <C>                   <C>                     <C>
Balance, December 27, 1998                                  $ 60,973,496           $     67,704           $ 98,099,034
   Exercise of stock options, net                                     --                     --                 50,880
   Net earnings                                                4,538,826                     --              4,538,826
   Change in unrealized gain on
        securities available-for-sale,
        net of income taxes                                           --                 12,617                 12,617
                                                                                                          ------------
   Comprehensive earnings                                                                                    4,551,443
                                                                                                          ------------
   Common stock repurchased                                           --                     --            (11,823,018)
                                                            ----------------------------------------------------------
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
                                                            ==========================================================
</TABLE>

See accompanying notes.


                                      F-7
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                        YEAR ENDED
                                                                 ----------------------------------------------------------
                                                                 DECEMBER 30,           DECEMBER 31,           DECEMBER 26,
                                                                     2001                   2000                   1999
                                                                 ----------------------------------------------------------
<S>                                                              <C>                    <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings (loss) before extraordinary items                       $    345,826           $ (3,976,657)          $  2,145,314
Adjustments to reconcile net earnings (loss) before
   extraordinary items to net cash provided by
   (used in) operating activities:
     Depreciation and amortization                                  4,660,937              5,785,790              7,100,525
     Amortization of deferred charges recorded as
       interest expense                                               608,804                718,694              1,101,689
     Recognition of previously deferred gains                        (305,391)            (2,684,184)            (5,140,869)
     Gain on sale of property and leasehold interests              (3,761,890)            (4,901,523)           (15,001,716)
     Deferred income tax (benefit) provision                       (3,298,148)             2,201,126              2,216,332
     Increase in minority interest in equity of
       consolidated subsidiaries and partnerships                      58,255                 57,246              1,909,605
     Compensation expense related to equity                                --                151,955                     --
     Changes in assets and liabilities:
       Trade receivables                                             (926,097)             2,221,758             (1,602,148)
       Construction contracts receivable                           (1,610,873)             5,268,475             (7,674,104)
       Costs and estimated earnings in
           excess of billings on construction
         contracts                                                 (3,020,903)             3,545,227             (3,560,272)
       Income and other taxes receivable and payable                8,326,498             (5,215,229)              (222,211)
       Prepaid expenses                                               (54,336)               261,551                (53,530)
       Other assets                                                   361,395                829,049             (1,996,951)
       Accounts payable and accrued expenses                        6,653,310             (5,419,990)            (1,843,337)
                                                                 ----------------------------------------------------------
Net cash provided by (used in) operating activities                 8,037,387             (1,156,712)           (22,621,673)

CASH FLOWS FROM INVESTING ACTIVITIES
    Decrease (increase) in restricted cash                         12,624,732            (12,788,021)              (904,029)
    Payments from notes receivable                                    681,433                418,098             12,317,668
    Capital expenditures                                          (20,931,949)            (8,830,699)           (20,101,074)
    Proceeds from sale of equipment                                        --                538,725                     --
    Proceeds from sale of property and leasehold
      interests                                                     2,907,258             39,680,623             70,915,913
    Proceeds from sale of leasehold interests, net
      of  expenses                                                         --             13,832,482                     --
    Deposits on sale/leaseback of hotels                                   --             (4,295,000)            (7,280,000)
                                                                 ----------------------------------------------------------
Net cash (used in) provided by investing activities                (4,718,526)            28,556,208             54,948,478
</TABLE>


                                      F-8
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED
                                                                 ---------------------------------------------------------
                                                                  DECEMBER 30,          DECEMBER 31,           DECEMBER 26,
                                                                      2001                  2000                   1999
                                                                 ---------------------------------------------------------
<S>                                                              <C>                    <C>                    <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Payments for deferred loan costs                                  (462,937)              (188,438)            (1,134,671)
   Proceeds from long-term debt                                     7,500,000             22,500,500             26,149,754
   Payments on long-term debt                                     (11,085,783)           (46,095,258)           (44,330,435)
   Payments on capitalized lease obligations                               --               (189,590)              (233,362)
   Distributions to minority interests                                     --               (261,834)              (100,000)
   Exercise of stock options                                            4,001                  4,001                 50,880
   Purchases of treasury stock                                     (1,909,670)            (1,216,125)           (11,823,018)
                                                                 ---------------------------------------------------------
     Net cash used in financing activities                         (5,954,389)           (25,446,744)           (31,420,852)

Net (decrease) increase in cash and cash equivalents
                                                                   (2,635,528)             1,952,752                905,953
Cash and cash equivalents  - beginning of year                      5,339,689              3,386,937              2,480,984
                                                                 ---------------------------------------------------------
Cash and cash equivalents  - end of year                         $  2,704,161           $  5,339,689           $  3,386,937
                                                                 ==========================================================
</TABLE>

See accompanying notes.


                                      F-9
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

     Years ended December 30, 2001, December 31, 2000 and December 26, 1999


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Business activities of ShoLodge, Inc. and subsidiaries (the "Company") are
composed primarily of owning, franchising, operating, leasing, and constructing
lodging facilities. Presently, there are three brands, Shoney's Inns, Baymont
Inns & Suites, and AmeriSuites. As of December 30, 2001, the Company derived its
hotel revenues from fourteen owned properties located in eight states across the
United States. Of these fourteen properties, five are located in Texas, two are
located in Mississippi, and two are located in Alabama. No other state has more
than one property. Twelve of the properties are Shoney's Inns, one is a Baymont
Inn & Suites, and one is an AmeriSuites hotel.

The Consolidated Financial Statements include the accounts of the Company and
its majority-owned and controlled 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 Year of 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.

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


                                      F-10
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Restricted Cash represents approximately $1,782,000 escrowed to fund the
completion of construction and furnishing of one hotel on a site presently owned
by the Company. This construction project is presently in progress and is
expected to be completed in the first quarter of 2002. Restricted cash also
includes $200,000 at one of the Company's major banks.

Accounts Receivable from Construction Contracts includes 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 were not
billable to customers at the date of the balance sheet. As of December 30, 2001,
$3,966,000 of the total construction amounts receivable were from three
contracts with three third party customers.

Property and Equipment is recorded at cost. 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. Equipment under capitalized leases is
amortized over the shorter of the estimated useful lives of the related assets
or the lease term using the straight-line method. Capital lease amortization is
included in depreciation expense. 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 26, 1999, December
31, 2000 and December 30, 2001 were approximately $2,004,000, $349,000, and
$858,000, respectively. Pre-opening costs are expensed as incurred.

Land Under Development or Held For Sale consists of land adjacent to hotels
developed by the Company and land adjoining the Company's corporate headquarters
which is being developed for sale or is held for sale.

Deferred Charges include loan costs incurred in obtaining financing and are
amortized using the interest method over the respective terms of the related
debt. In addition, deferred charges include costs incurred in amending the
Company's franchise license agreement, which is being amortized on the
straight-line method over twenty years. Accumulated amortization totaled
$3,309,360 and $4,089,029 as of December 31, 2000 and December 30, 2001,
respectively.


                                      F-11
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Investments. The Company's investment securities have been classified as
available-for-sale and are included in other assets in the accompanying balance
sheets. Available-for-sale securities are carried at fair value with unrealized
holding gains and losses, net of tax effects, reported as a separate component
of shareholders' equity.

Intangible Assets include excess of cost over fair value of net assets acquired
(goodwill) in the amount of $2,537,070 and $2,387,099 at December 31, 2000 and
December 30, 2001, respectively, which is amortized on the straight-line method
over a period of twenty-five years. The amounts reported are net of accumulated
amortization of $1,212,254 and $1,362,225, as of December 31, 2000 and December
30, 2001, respectively. In addition, costs of trademark are included in the
amount of $411,936 and $388,744 as of December 31, 2000 and December 30, 2001,
respectively, and are amortized on the straight-line method over a period of
twenty years. This amount is net of accumulated amortization of $80,004 and
$103,196 as of December 31, 2000 and December 30, 2001, respectively.

Other Assets include cash surrender value of life insurance, non-current portion
of direct financing leases, securities available for sale, and base linens
stock.

Asset Impairment. The Company records impairment losses on long-lived assets
used in operations and 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 their carrying amount.

Advertising. The Company charges the costs of advertising to expense as
incurred. Advertising expense was approximately $1,920,000, $1,117,000 and
$486,000 for the years ended December 26, 1999, December 31, 2000 and December
30, 2001, respectively.

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


                                      F-12
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenues from hotel operations are recognized as services are rendered.
Construction and development revenues from fixed-price 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.
Franchising, reservation and management revenues are recognized as earned.
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.

Earnings Per Common Share for 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. See Note 7 for pro forma disclosures using the fair value
method as described in SFAS No. 123, Accounting for Stock-Based Compensation.

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 31, 2000, and December 30, 2001, $59,560,899 and $58,799,391,
respectively, of notes receivable are from a group of companies affiliated with
one another which acquired and operate the 16 hotels described in Note 13.
Although notes receivable generally consist of first mortgages notes that are
cross- collateralized and cross-defaulted, in the event the fair values of the
underlying


                                      F-13
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

assets were to be less than balances of the first mortgage notes, the notes
receivable could be under-collateralized.

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

The Company will apply the new rules on accounting for goodwill and intangible
assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of SFAS No. 142 is expected to result in an increase
in net income of approximately $263,000 ($0.05 per share) per year. During 2002,
the Company will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.

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 and had no material
effect on the Company's results of operations or financial position.

Reclassifications. Certain reclassifications have been made in the 1999 and 2000
consolidated financial statements to conform to the classifications used in
2001.


                                      F-14
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements


2. PROPERTY AND EQUIPMENT

Property and equipment consists of:

<TABLE>
<CAPTION>

                                                                      DECEMBER 30,            December 31,
                                                                         2001                     2000
                                                                      -------------------------------------
        <S>                                                           <C>                     <C>
        Land and improvements                                         $  19,953,352           $  20,209,885
        Buildings and improvements                                       69,133,846              64,560,598
        Furniture, fixtures, equipment and software                      26,178,322              27,254,209
        Construction in progress                                          7,846,670               2,336,957
                                                                      -------------------------------------
                                                                        123,112,190             114,361,649
        Less accumulated depreciation and amortization                  (21,944,927)            (23,526,651)
                                                                      -------------------------------------
                                                                      $ 101,167,263           $  90,834,998
                                                                      =====================================
</TABLE>

3. LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
                                                                            2001                    2000
                                                                      -------------------------------------
        <S>                                                           <C>                     <C>
        Industrial revenue bonds, due in varying
           amounts through 2017                                       $   2,905,000           $   2,982,500
        7.50% Convertible subordinated debentures                        25,596,000              29,008,000
        9.75% Series A senior subordinated notes                         20,167,000              21,824,000
        9.55% Series B senior subordinated notes                         20,341,000              22,091,000
        Bank credit facility                                             13,000,000              10,000,000
        Notes payable - bank and other, bearing interest
           at 2.01% to 8.19%, due in varying amounts
           through 2010                                                   8,343,081               9,134,149
                                                                      -------------------------------------
                                                                         90,352,081              95,039,649
        Less current portion                                               (650,700)               (870,636)
                                                                      -------------------------------------
                                                                      $  89,701,381           $  94,169,013
                                                                      =====================================
</TABLE>


                                      F-15
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements


3. LONG-TERM DEBT (CONTINUED)

The Industrial Revenue Bonds ("IRBs") and substantially all notes payable are
collateralized by property and equipment with a net book value of approximately
$9.9 million at December 30, 2001. 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 (2.01%
at December 30, 2001).

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 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.

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. 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


                                      F-16
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements


3. LONG-TERM DEBT (CONTINUED)

in connection with the sale of 16 of the Company's lodging facilities in the
third quarter of 1998 (Note 13). 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, or (c) $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 30, 2001, the Company had
$13 million in borrowings outstanding under this credit facility, consisting of
the $10 million term loan and $3 million on the revolving line of credit.

The Company also maintains a $1 million unsecured line of credit with another
bank, bearing interest at the lender's prime rate, maturing May 31, 2002. As of
December 31, 2000, and December 30, 2001, the Company had no borrowings
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 11). 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 26, 1999, December 31, 2000, and December 30, 2001,
the Company repurchased $12,598,000, $29,784,000, and $3,412,000, respectively,
of the Company's previously issued subordinated debt at a discount from face
value. These repurchases resulted in extraordinary pretax gains, net of the
write-off of related unamortized deferred financing costs, of $3,861,000,
$7,307,000, and $913,000 in 1999, 2000, and 2001, respectively.


                                      F-17
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

3. LONG-TERM DEBT (CONTINUED)

Maturities of long-term debt are as follows:

<TABLE>
<S>                                                 <C>
         2002                                       $        650,700
         2003                                              2,599,476
         2004                                             39,273,902
         2005                                                736,624
         2006                                             20,966,491
         Thereafter                                       26,124,888
                                                    ----------------
                                                    ----------------
                                                    $     90,352,081
                                                    ================
</TABLE>

4. COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries lease certain property and equipment under
noncancelable operating lease agreements. Total rental expense under operating
leases for the years ended December 26, 1999, December 31, 2000 and December 30,
2001 was approximately $18,476,000, $12,987,000 and $582,000, respectively.

Future minimum rental payments are as follows:

<TABLE>
<S>                                                 <C>
              2002                                  $         350,000
              2003                                            350,000
              2004                                            350,000
              2005                                            291,667
              Thereafter                                           --
                                                    -----------------
                                                    $       1,341,667
                                                    =================
</TABLE>

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 30, 2001. 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 $-0-
and $125,000 as of December 31, 2000 and December 30, 2001, respectively, to
satisfy workers compensation self-insurance security deposit requirements.


                                      F-18
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

4. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 30,
2001. The Company has a lien against the property and has filed an arbitration
claim against the owner. The arbitration hearing has been scheduled for July 22,
2002. While the outcome of the proceeding cannot presently be determined,
management does not believe it is probable that the carrying value of the
receivable has been impaired. Accordingly, an allowance for doubtful
collectibility was not necessary at December 30, 2001. Should the Company be
unsuccessful in the arbitration hearing, the required write-off of the
receivable would be charged to 2002 operations.

As discussed in Note 12, the Company has filed an arbitration proceeding against
Prime Hospitality Corp., seeking $20,000,000 in monetary damages related to the
non-use of the Company's reservation center as agreed. The outcome of the
arbitration proceeding cannot presently be determined. Any monetary damages
awarded to the Company from the arbitration proceeding would be recorded as
income upon receipt.


                                      F-19
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

5. EARNINGS PER SHARE

The following tables reconcile earnings and weighted average shares used in the
earnings per share ("EPS") calculations for fiscal years 2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED
                                                               --------------------------------------------------------------
                                                                 DECEMBER 30,            DECEMBER 31,           DECEMBER 26,
                                                                     2001                   2000                   1999
                                                               ---------------        ---------------         ---------------
<S>                                                            <C>                    <C>                     <C>
NUMERATOR:
Earnings (loss)  before extraordinary items                    $       345,826        $    (3,976,657)        $     2,145,314
Extraordinary gain                                                     565,719              4,554,319               2,393,512
                                                               ---------------        ---------------         ---------------
Numerator for basic earnings per share- earnings               $       911,545        $       577,662         $     4,538,826
   available to shareholders
                                                               ===============        ===============         ===============

DENOMINATOR:
Denominator for basic earnings per share -
   weighted-average shares                                           5,464,533              5,471,962               6,517,717
Effect of dilutive securities:
   Options                                                              65,292                 81,890                 227,118
                                                               ---------------        ---------------         ---------------
Denominator for diluted earnings per share -                         5,529,825              5,553,852               6,744,835
   adjusted weighted-average shares
                                                               ===============        ===============         ===============

BASIC EARNINGS (LOSS) PER SHARE:
Earnings (loss) before extraordinary items                     $          0.06        $         (0.73)        $          0.33
Extraordinary gain                                                        0.10                   0.84                    0.37
                                                               ---------------        ---------------         ---------------
Net earnings                                                   $          0.16        $          0.11         $          0.70
                                                               ===============        ===============         ===============
DILUTED EARNINGS (LOSS)  PER SHARE:
Earnings (loss) before extraordinary items                     $          0.06        $         (0.72)        $          0.32
Extraordinary gain                                                        0.10                   0.82                    0.35
                                                               ---------------        ---------------         ---------------
Net earnings                                                   $          0.16        $          0.10         $          0.67
                                                               ===============        ===============         ===============
</TABLE>

The Company's 7.5% debentures were convertible into 2,283,252, 1,244,444, and
1,098,069 shares of common stock at December 26, 1999, December 31, 2000 and
December 30, 2001, respectively, but were not included in the computation of
diluted EPS, as such securities were anti-dilutive.


                                      F-20
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable, and
borrowings under lines of credit approximate fair values due to the short-term
maturities of these instruments. The carrying value of notes receivable
approximate fair value due to 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 value of
industrial revenue bonds approximate 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 30, 2001 and December 31, 2000:

<TABLE>
<CAPTION>
                                                   2001                                    2000
                                      ---------------------------------       ---------------------------------
                                       FAIR VALUE        CARRYING VALUE        Fair Value        Carrying Value
                                      ------------       --------------       ------------       --------------
<S>                                   <C>                <C>                  <C>                <C>
Convertible subordinated
   debentures                         $ 16,253,460        $ 25,596,000        $ 17,840,000        $ 29,008,000

Senior subordinated
   notes                                25,719,970          40,508,000          30,740,000          43,915,000
                                      ------------        ------------        ------------        ------------
                                      $ 41,973,430        $ 66,104,000        $ 48,580,000        $ 72,923,000
                                      ============        ============        ============        ============
</TABLE>

As of December 31, 2000 and December 30, 2001, the aggregate fair values of
securities available-for-sale were $203,524 and $279,506, respectively.

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 date of grant and
expire ten years after date of grant. The plan has now expired, and no more
options will be granted under this plan.


                                      F-21
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

7. STOCK OPTION PLAN (CONTINUED)

A summary of the status of the Plan for the years ended December 26, 1999,
December 31, 2000 and December 30, 2001, follows:

<TABLE>
<CAPTION>
                                                                           SHARES SUBJECT TO OPTION
                                                               -------------------------------------------------
                                                               AVAILABLE FOR                    WEIGHTED AVERAGE
                                                                  GRANT           OUTSTANDING   EXERCISE PRICE
                                                               -------------      -----------   ----------------
<S>                                                               <C>               <C>            <C>
December 27, 1998                                                 133,610            722,037         $3.75
  Granted                                                          (5,000)             5,000          5.50
  Exercised                                                            --            (13,568)         3.75
  Canceled                                                         18,134            (18,134)         3.75
                                                                  -------           --------         -----
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
                                                                  =======           ========         =====
</TABLE>

The weighted average fair value of options granted during the year was $2.96 for
the year ended December 26, 1999. No options were granted in 2000 or 2001.


                                      F-22
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

7. STOCK OPTION PLAN (CONTINUED)

The following table summarizes information relating to the stock options
outstanding as of December 30, 2001:

<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
---------------- --------------------------------------------------- --------------------------------
                      NUMBER          WEIGHTED-                          NUMBER
                   OUTSTANDING         AVERAGE         WEIGHTED-       EXERCISABLE      WEIGHTED-
                        AT            REMAINING         AVERAGE            AT            AVERAGE
   EXERCISE        DECEMBER 30,      CONTRACTUAL        EXERCISE     DECEMBER 30,        EXERCISE
     PRICE             2001              LIFE            PRICE            2001            PRICE
---------------- ----------------- ----------------- --------------- ---------------- ---------------
<S>                <C>               <C>               <C>           <C>                 <C>
     $3.75            55,500              0.13            $3.75          55,500            $3.75
      3.75            29,467             2.05              3.75          29,467             3.75
      3.75            41,000             3.33              3.75          41,000             3.75
      3.75            68,000             4.59              3.75          68,000             3.75
      3.75            83,000             5.42              3.75          66,400             3.75
      5.50             5,000             7.39              5.50           2,000             5.50
                 -----------------                                   ----------------
                     281,967                                            262,367
                 =================                                   ================
</TABLE>

Had the fair value of options granted under the plan beginning in 1997 been
recognized as compensation expense on a straight-line basis over the vesting
period of the options, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                        2001                 2000               1999
                                                   ------------         ------------       ------------
<S>                       <C>                      <C>                  <C>                <C>
Net earnings              As reported              $    911,545         $    577,662       $  4,538,826
                            Pro forma                   815,860              (18,605)         3,898,931

Basic earnings            As reported                      0.16                 0.11               0.70
  per share                 Pro forma                       .15                  .00               0.60

Diluted earnings          As reported                      0.16                 0.10               0.67
  per share                 Pro forma                       .15                  .00               0.58
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black Scholes option pricing model with the following weighted average
assumptions used for grants in 1999: no dividend yield for all years; expected
volatility of 32%; risk free interest rate of 6.10%; and expected life of 9
years. There were no grants in 2000 or 2001.


                                      F-23
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

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 30,
2001, the total authorized amount of the Company's common stock repurchases was
$23,000,000. The cumulative number of shares repurchased as of December 30,
2001, was 3,592,067 shares at a cost of $20,325,374.

9. INCOME TAXES

The provision for income taxes from continuing operations, before extraordinary
items, consists of the following:

<TABLE>
<CAPTION>
                                                                   2001                 2000                1999
                                                               ------------         ------------        ------------
<S>                                                            <C>                  <C>                 <C>
Current expense (benefit):
   Federal                                                     $  3,232,152         $ (3,978,451)       $   (278,165)
   State                                                            210,996                   --             (29,168)
                                                               ------------         ------------        ------------
                                                                  3,443,148           (3,978,451)           (307,333)
Deferred expense (benefit)                                       (3,298,148)           2,201,125           2,216,333
                                                               ------------         ------------        ------------
                                                               $    145,000         $ (1,777,326)       $  1,909,000
                                                               ============         ============        ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                   2001                 2000                1999
                                                               ------------         ------------        ------------

<S>                                                            <C>                  <C>                 <C>
Federal income tax based on the
   statutory rate                                              $    186,688         $ (2,176,994)       $  2,087,372
State income taxes, less
   federal income tax benefit                                         2,781              209,028             218,876
Minority interest                                                   (19,807)             (20,036)           (738,444)
Interest on deferred gain                                           373,560              466,000             250,028
Previously accrued income taxes                                    (451,465)                  --                  --
Permanent differences & other                                        53,243             (255,324)             91,168
                                                               ------------         ------------        ------------
                                                               $    145,000         $ (1,777,326)       $  1,909,000
                                                               ============         ============        ============
</TABLE>


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.


                                      F-24
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

9. INCOME TAXES (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                  2001                  2000
                                                               ------------         ------------
<S>                                                            <C>                   <C>
Deferred tax liabilities:
   Differences between book and tax basis of
     property                                                  $ (2,151,000)        $         --
   Profits on installment sales                                  (8,722,000)          (9,432,000)
   Unrealized gain on securities available for
     sale                                                           (64,000)             (34,000)
   Other                                                           (321,000)            (270,000)
                                                               ------------         ------------
                                                                (11,258,000)          (9,668,000)

Deferred tax assets:
   Difference between book and tax basis of
     property                                                            --              454,000
   Deferred profit on sales of hotels                             6,154,000            3,724,000
   Direct financing leases                                           88,000               83,000
   Differences between book and tax losses
     recognized by minority interests                               725,000              743,000
   Allowance for doubtful accounts                                   70,000              147,000
   Alternative minimum tax credits                                  281,000                   --
   Net operating losses                                           5,866,000            2,687,000
   Other                                                            168,000              261,000
                                                               ------------         ------------
Total deferred tax asset                                         13,352,000            8,099,000
Valuation allowance                                              (3,086,000)          (2,687,000)
                                                               ------------         ------------
Deferred tax asset                                               10,266,000            5,412,000
                                                               ------------         ------------
Net deferred tax liability                                     $   (992,000)        $ (4,290,000)
                                                               ============         ============
</TABLE>


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


                                      F-25
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

9. INCOME TAXES (CONTINUED)

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 interest of $724,812 (no penalties). Both the income
tax due and the statutory interest are provided for in the accompanying
financial statements.

The Company has a federal net operating loss carryforward of approximately
$8,000,000 as of December 30, 2001. The Company expects to realize the benefit
of this deferred tax asset and therefore no valuation allowance has been placed
against it. In addition, the Company has state net operating loss carryforwards
of approximately $85,000,000 and $73,000,000 at December 30, 2001 and December
31, 2000 respectively. These losses expire form tax years 2002 through 2021.
Because of the uncertainty of the ultimate realization of this deferred tax
asset, the Company has established a valuation allowance for the full amount.
During 2001 the valuation allowance increased $399,000.

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.

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. 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 and $102,055 of
discount on these notes as interest income in 2000 and 2001, respectively.


                                      F-26
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

11. 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 12 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 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. 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 expiration of the lease. 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 $14
million guaranty deposit and the $25.6 million in lease security deposits.


                                      F-27
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

12. 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 interest in 24
Sumner Suites hotels, for a total of $15.6 million (Note 11). The Company
received $100,000 in cash, $13.9 million in the form of an escrow fund 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 to construct two hotels on sites presently 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 is presently in process
and is expected to be completed in the first quarter of 2002. These projects
were funded by the $13.9 million escrow money from the sale and any excess
escrow funds will then be released to the Company. The Company also gave
Hospitality Properties Trust ("HPT"), the owner of the 24 Sumner Suites whose
leasehold rights were assigned to Prime, 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, without payment or receipt of
any additional consideration. If the Company does not consent to the property
exchange, then HPT can require the Company to purchase the two properties. 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 is being operated by the Company pending the exchange,
which is expected to occur before the Company's first fiscal quarter ending
April 21, 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 Shoney's Inn brand hotel in
the restricted area.


                                      F-28
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

12. SALE OF LEASEHOLD INTERESTS (CONTINUED)

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 two of the hotels
subject to possible exchange, and recognized extraordinary 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 presently 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 and management 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 have selected an arbitrator, and the
arbitration hearing has been scheduled to begin on April 15, 2002.

13. 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 24-year amortization period at a 7.50%
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, $77,000 of which was recognized
in 1998, with the remaining $11.9 million recognized in 1999 as the criteria for
full accrual sales accounting were satisfied.


                                      F-29
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

14. SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                   2001                 2000                1999
                                                               ------------         ------------        ------------

<S>                                                            <C>                  <C>                 <C>

Cash paid during the year for interest                         $  8,776,470         $ 11,114,856        $ 14,030,265
                                                               ============         ============        ============
Cash (received) paid during the year (from) for
   income taxes                                                $ (3,994,184)        $    634,046        $    277,890
                                                               ============         ============        ============
Significant non-cash activities:
     Investing:
       Proceeds from sale of property arising
         from notes receivable                                 $  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        $         --
                                                               ------------         ------------        ------------
                                                               $  6,507,500         $  5,998,874        $         --
                                                               ============         ============        ============
</TABLE>

15. OPERATING SEGMENT INFORMATION

The Company's significant operating segments are hotel operations, franchising
and management and construction and development. The hotel operating segment has
represented approximately 80%, 72%, and 28% of total revenues for the years
ending December 26, 1999, December 31, 2000, and December 30, 2001,
respectively. The construction and development segment represented approximately
56% of total revenues in the year ended December 30, 2001, as compared with
approximately 14% in 1999 and 19% in 2000. 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 and management segment include franchising
revenues from one controlled group of franchisees of 16 Shoney's Inns which
contributed approximately $1.0 million, or 24.8%, $920,000, or 25.5%, and $1.9
million, or 45.9%, of total franchising and management revenues, after
elimination of intersegment amounts, in 1999, 2000 and 2001, respectively.
Construction and development revenues earned in 1999 included two construction
contracts with one customer comprising approximately


                                      F-30
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

15. OPERATING SEGMENT INFORMATION (CONTINUED)

$11.0 million, or 97.7%, of total construction revenues. Construction and
development 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 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.

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

<TABLE>
<CAPTION>
                                                                  2001              2000                1999
                                                               ----------         ----------         ----------
<S>                                                            <C>                <C>                <C>
Revenues:
   Hotel revenues from external
     customers                                                 $   18,119         $   49,150         $   67,623
   Franchising and management                                       5,319              6,975              8,687
   Construction and development                                    41,650             15,094             26,413
   Elimination of intersegment
     franchising and construction
     revenue                                                      (16,156)            (7,141)           (20,306)
                                                               ----------         ----------         ----------
Total revenues                                                 $   48,932         $   64,078         $   82,417
                                                               ==========         ==========         ==========

Operating profit (loss):
    Hotel                                                      $    2,909         $     (723)        $    1,640
    Franchising and management                                     (6,010)            (5,526)            (6,084)
    Construction and development                                    1,965               (327)             1,361
                                                               ----------         ----------         ----------
Total operating profit (loss)                                  $   (1,136)        $   (6,576)        $   (3,083)
                                                               ==========         ==========         ==========

Total assets:
   Hotel                                                       $  152,142         $  138,421         $  200,773
    Franchising and management                                     44,500             63,351             57,986
    Construction and development                                    9,945              2,859             11,555
                                                               ----------         ----------         ----------
Total assets                                                   $  206,587         $  204,631         $  270,314
                                                               ==========         ==========         ==========

Capital expenditures:
   Hotel                                                       $   18,211         $    3,595         $   16,955
    Franchising and management                                      2,555              5,129              3,126
    Construction and development                                      166                107                 20
                                                               ----------         ----------         ----------
Total capital expenditures                                     $   20,932         $    8,831         $   20,101
                                                               ==========         ==========         ==========

Depreciation and amortization:
   Hotel                                                       $    3,527         $    4,609         $    5,920
   Franchising and management                                       1,068              1,130              1,143
   Construction and development                                        66                 47                 38
                                                               ----------         ----------         ----------
Total depreciation and  amortization                           $    4,661         $    5,786         $    7,101
                                                               ==========         ==========         ==========
</TABLE>


                                      F-31
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

16. 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 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 amounted to $80,782 in 2000 and $51,985
in 2001.


                                      F-32
<PAGE>

                         ShoLodge, Inc. and Subsidiaries

                   Notes to consolidated Financial Statements

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly financial information for
the years ended December 30, 2001 and December 31, 2000:

<TABLE>
<CAPTION>
                                                                        QUARTERS
                                              -----------------------------------------------------------
                                                 FIRST           SECOND          THIRD           FOURTH
                                              ----------       ----------      ---------        ---------
                                                        (IN (000'S) EXCEPT FOR PER SHARE DATA)
<S>                                           <C>              <C>             <C>              <C>
2001
  REVENUES                                    $   11,063       $   10,852      $  12,941        $  14,076
OPERATING EARNINGS (LOSS)                           (543)             213            (48)            (758)
EARNINGS (LOSS) BEFORE
EXTRAORDINARY                                      1,532              (52)          (275)            (859)
  ITEMS
EXTRAORDINARY GAIN                                    54              105            367               40
  NET INCOME (LOSS)                                1,586               53             92             (819)
  NET INCOME (LOSS) PER SHARE:
  BASIC:
      BEFORE EXTRAORDINARY ITEMS                     .28             (.01)          (.05)            (.16)
  EXTRAORDINARY GAIN                                 .01              .02            .07              .00
      NET INCOME (LOSS)                              .29              .01            .02             (.16)
   DILUTED:
    BEFORE EXTRAORDINARY ITEMS                       .28             (.01)          (.05)            (.16)
EXTRAORDINARY GAIN                                   .01              .02            .07              .00
    NET INCOME (LOSS)                                .29              .01            .02             (.16)

2000
  Revenues                                    $   27,390       $   21,593      $   7,508        $   7,587
Operating loss                                    (2,014)          (2,610)          (548)          (1,404)
Earnings (loss) before
extraordinary                                     (2,283)             350           (803)          (1,241)
  items
Extraordinary gain                                   251            2,287          1,919               98
  Net income (loss)                               (2,032)           2,637          1,116           (1,143)
  Net income (loss) per share:
  Basic:
      Before extraordinary items                    (.43)             .07           (.14)            (.22)
  Extraordinary gain                                 .05              .43            .34              .02
      Net income (loss)                             (.38)             .50            .20             (.20)
   Diluted:
    Before extraordinary items                      (.43)             .07           (.14)            (.22)
Extraordinary gain                                   .05              .43            .34              .02
    Net income (loss)                               (.38)             .50            .20             (.20)
</TABLE>


                                      F-33