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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



(Mark One)

|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | ----------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
| |  | ----------------------------------------------



For the fiscal year ended December 31, 2002



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | --------------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
| |  | -------------------------------------------------



for the transition from  to



Commission File Number: 0-23256



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JAMESON INNS, INC.

(Exact name of Registrant as specified in its Articles)



|Georgia                                                        |  | 58-2079583                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|8 Perimeter Center East, Suite 8050, Atlanta, Georgia |  | 30346-1604
|----------------------------------------------------- |  | ----------
|(Address of principal executive offices)              |  | (Zip code)



Registrants telephone number, including area code: (770) 481-0305



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



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



Common Stock, par value $0.10 per share



9.25% Series A Cumulative Preferred Stock, par value $1.00 per share



$1.70 Series S Cumulative Convertible Preferred Stock, par
value $1.00 per share

(Title of Each Class)



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



Aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant as of March 4, 2003: $23,717,942.



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



Number of shares of common stock outstanding on March 4, 2003: 11,859,688.



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FORM 10-K

JAMESON INNS, INC.

ANNUAL REPORT



YEAR ENDED DECEMBER 31, 2002



Table of Contents



|                           |  |                                                                                                |  | Page
|-------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|                          
|Forward Looking Statements |  | 1                                                                                             
|                          
|PART I                     |  |                                                                                               
|                          
|Item 1.                    |  | Business                                                                                       |  | 2   
|                          
|Item 2.                    |  | Properties                                                                                     |  | 28  
|                          
|Item 3.                    |  | Legal Proceedings                                                                              |  | 32  
|                          
|Item 4.                    |  | Submission of Matters to a Vote of Security Holders                                            |  | 32  
|                          
|PART II                    |  |                                                                                               
|                          
|Item 5.                    |  | Market for Jamesons Common Equity and Related Stockholder Matters                             |  | 32  
|                          
|Item 6.                    |  | Selected Financial Data                                                                        |  | 33  
|                          
|Item 7.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 36  
|                          
|Item 7A.                   |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 43  
|                          
|Item 8.                    |  | Financial Statements and Supplementary Data                                                    |  | 44  
|                          
|Item 9.                    |  | Changes in and Disagreements on Accounting and Financial Disclosure                            |  | 44  
|                          
|PART III                   |  |                                                                                               
|                          
|Item 10.                   |  | Directors and Executive Officers of the Registrant                                             |  | 44  
|                          
|Item 11.                   |  | Executive Compensation                                                                         |  | 46  
|                          
|Item 12.                   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 48  
|                          
|Item 13.                   |  | Certain Relationships and Related Transactions                                                 |  | 50  
|                          
|Item 14.                   |  | Controls and Procedures                                                                        |  | 51  
|                          
|PART IV                    |  |                                                                                               
|                          
|Item 15.                   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 52  



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JAMESON
INNS, INC.

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF
1934



Forward-Looking Statements



This report, including the documents
incorporated in this report by reference, contains certain forward-looking statements. These include statements about changes in interest rates, our expansion plans, acquisition or leasing of additional land parcels, construction of new hotels and
expansion of existing hotels, disposition of land parcels and hotels, access to debt financing and capital, payment of quarterly dividends, future corporate strategies and direction, effects and circumstances relating to terrorist acts similar in
nature to those which occurred on September 11, 2001, the national economic slowdown and other matters. These statements are not historical facts but are expectations or projections based on certain assumptions and analyses made by our senior
management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors. Whether actual results and developments will conform to our expectations and predictions is, however,
subject to a number of risks and uncertainties. These include, but are not limited to:



| |  |  | Ourability to:
| | - |  | --------------



| |  |  | manage our business in a cost-effective manner given the number of Inns we own and the geographic areas in which they are located;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide ongoing renovation and refurbishment of the Inns sufficient to maintain consistent quality throughout the chain;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | sell, dispose of or otherwise deal with Inns and land parcels which do not meet our investment criteria;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | raise additional equity capital adequate for our future growth;
| | - |  | ---------------------------------------------------------------



| |  |  | assess accurately the market demand for new Inns and expansions of existing Jameson Inns;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | secure construction and permanent financing for new Inns on favorable terms and conditions;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | identify and purchase or lease new sites which meet our various criteria, including reasonable land prices or ground lease terms, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | contract for the construction of new Inns and expansions of existing Jameson Inns in a manner which produces Inns consistent with our present quality and standards
at a reasonable cost and without significant delay.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The ability of our lessee, Kitchin Hospitality, LLC to manage the Inns profitably.
| | - |  | ----------------------------------------------------------------------------------



| |  |  | General economic, market and business conditions, particularly those in the lodging industry and in the geographic markets in which the Inns are located.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in rates of interest we pay on our mortgage indebtedness.
| | - |  | -----------------------------------------------------------------



| |  |  | The business opportunities (or lack of opportunities) that may be presented to and pursued by us.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Changes in laws or regulations.
| | - |  | -------------------------------



| |  |  | Availability and cost of insurance covering the various risks we incur.
| | - |  | -----------------------------------------------------------------------



| |  |  | Our continued qualification as a real estate investment trust, or REIT, and continuation of favorable income tax treatment for REITs under federal tax laws.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



1



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The words
estimate, project, intend, expect, anticipate, believe and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at
various places throughout this report and the documents incorporated in this report by reference as well as in other written materials, press releases and oral statements issued by us or on our behalf. We caution you not to place undue reliance on
these forward-looking statements, which speak only as of the date that they are made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this
report.



PART I



ITEM 1. BUSINESS



General



We are a self-administered real estate
investment trust, commonly called a REIT, headquartered in Atlanta, Georgia. We were incorporated under the laws of Georgia in 1993. However, we originally began operations as a Delaware corporation in 1988. We develop and own limited service hotel
properties (Inns) in the southeastern United States under the trademark The Jameson Inn®. In addition, we own Inns in the midwestern United States operating under the trademark Signature Inn®. In this report, we sometimes refer separately to the Inns operating under the Jameson trademark as Jameson
Inns and to those operating under the Signature trademark as Signature Inns.



We have historically focused on developing Inns in communities which have a strong and growing industrial or commercial base and also serve a growing customer base with additional locations. Generally,
our Inns are rooms-only facilities designed to appeal to price and quality conscious travelers. Our target customers are business travelers, such as sales representatives and government employees, as well as families and leisure travelers attending
events in our markets, such as college or cultural gatherings, fairs, festivals and family reunions.



In late 1998, we designed and began building new three-story, interior corridor structures with 56 to 80 rooms and elevator access to each
floor. Prior to 1998, we built two-story structures with exterior access to the guest rooms constructed on a one- to two-acre tract with an outdoor swimming pool, fitness center and parking area. All Jameson Inns are Colonial-style structures which
feature amenities such as swimming pools, fitness centers, remote-controlled television with access to cable programming, including HBO, free local calls, complimentary continental breakfast and newspaper, king-sized or double beds, attractive
decor, quality furnishings and, in select rooms, whirlpool baths and small refrigerators. Based on market demand, certain Jameson Inns have been expanded since their initial construction.



A typical Signature Inn incorporates a two-story atrium, and a bright, well-appointed and richly decorated
lobby and registration area. Most Signature Inns contain approximately 120 guest rooms, averaging over 300 square feet per room, swimming pools, exercise facilities and a complimentary breakfast, and other amenities including a microwave,
refrigerator, in-room coffee, iron and ironing board and hair dryer in all guest rooms. Because approximately 65% of Signature Inn guests are business travelers, we emphasize services designed for the business traveler, such as large, in-room desks,
and voicemail.



The lodging industry is generally
divided into three broad categories based on the type of services provided. The first of these categories, full service hotels and resorts, offers their guests rooms, food and beverage services, meeting rooms, room service and similar guest
services, and, in some cases, resort entertainment and activities. The second category is the limited service hotel, which generally offers rooms only and amenities such as swimming pools, continental breakfast and similar, limited services. The
third category is the all-suite hotel or motel, which offers guests more spacious accommodations and usually kitchen facilities in the suite and common laundry facilities. Each of these categories is generally subdivided into classifications based
on price and quality. The terminology generally used in the hotel industry describes properties as luxury at the high end, economy in the middle and budget at the low end of the scale. Prices for each of these categories vary by region and locale.
Our Inns fall within the category of limited service, economy hotels.



2



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As a REIT, we
are prohibited from operating our properties other than through an independent contractor or a taxable REIT subsidiary. Accordingly, all of the Inns we own are leased to Kitchin Hospitality, LLC under master leases. These master leases require
Kitchin Hospitality to pay us base rent based on the number of rooms in operation (available for rent) on the first day of each month and percentage rent based on room revenues as defined in the master leases. Percentage rent is designed to allow us
to participate in growth in revenues at the Inns. The master leases generally provide that a portion of aggregate room revenues in excess of specified amounts will be paid to us as percentage rent.



Kitchin Hospitality is wholly owned by Thomas W. Kitchin, our
chairman and chief executive officer, and members of his family including Craig Kitchin, our president and chief financial officer. References to Kitchin Hospitality throughout this report refer to either Kitchin Hospitality, LLC (formerly named
Jameson Hospitality, LLC), or its predecessors.



Our mailing address is: Jameson Inns, Inc., 8 Perimeter Center East, Suite 8050, Atlanta, Georgia 30346-1604. Our telephone number is: (770) 481-0305.



Material Developments in 2002



During 2002, we disposed of three of our exterior corridor Jameson Inn hotels (117 rooms total), located
mostly in markets that have been under-performing. The Jameson Inns located in Covington and Winder, Georgia were sold in the second quarter of 2002 and the Jameson Inn located in Macon, Georgia was sold in the third quarter. We sold one Signature
Inn in Cincinnati, Ohio (Northeast), in the first quarter of 2002. During 2002, upon completion of the sale of these four hotel properties for which impairment losses were not recorded, we recognized net gains of $585,000. Additionally, we sold a
tract of land during the third quarter of 2002 resulting in a gain of $9,000.



One additional Signature Inn was classified as held for sale at December 31, 2002 and was recorded at the lower of cost or fair value less anticipated selling costs. This Signature Inn was sold in
February 2003. During 2003, we may identify for disposition additional Inns which do not meet our investment criteria.



During 2002, we opened one new Jameson Inn located in West Monroe, Louisiana. In addition, four expansions of existing Jameson Inns were
completed. One additional Jameson Inn expansion under construction at December 31, 2002 was completed during January 2003.



During 2002, we entered into multiple interest rate cap agreements to eliminate our exposure to increases in interest rates on $109.0
million of our total outstanding indebtedness. Interest rate cap agreements are designed to limit our exposure to increases in the prime rate above specified cap rates for one-year periods commencing on the interest rate readjustment dates. However,
due to declining short-term interest rates during 2002, these agreements did not come into play. During 2002, the weighted average interest rate on debt was 6.6% compared to 8.3% during 2001.



On January 23, 2003, we announced a quarterly dividend of
$0.05 per common share. The dividend was paid on February 20, 2003 to shareholders of record on February 4, 2003. The Companys future decisions to pay dividends on its common stock will be determined each quarter based upon the operating
results of that quarter, economic conditions, and other operating trends.



Risk Factors



Risks Which are Specific
to Jameson



The following risks relate
specifically to the conduct of our business. You should also refer to the information under the heading Forward Looking Statements on page 1.



3



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There are
constraints on our future growth. In January 2003, we completed the expansion of one Inn under construction at December 31, 2002. We have no other immediate development -or expansion growth plans. Our decision and our ability to expand in the
future will depend on numerous factors, including those unique to us and those generally associated with overall hotel, real estate and general economic conditions. Those factors specific to us include our ability to:



| |  |  | manage our business in a cost-effective manner given the number and geographic dispersion of our Inns.
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | assess accurately the market demand for new Inns and expansions of existing Inns;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | raise additional equity capital adequate to pursue further growth plans;
| | - |  | ------------------------------------------------------------------------



| |  |  | secure construction and permanent financing to finance such development on terms and conditions favorable to us;
| | - |  | ----------------------------------------------------------------------------------------------------------------



In addition, risk factors affecting our profitability include
Kitchin Hospitalitys ability both to manage our Inns and to attract, develop and retain the personnel, procedures and practices necessary to generate the room revenues which we anticipate will result from any future development and expansions
of Inns.



Some or all of the factors discussed
above could preclude or at least delay any future development of new Inns and the expansion of existing properties. Similarly, the terms of financing available to us or the operating results of any new or expanded Inns could have a negative economic
effect on us and reduce the amount of cash available for distribution as dividends.



There are potential conflicts of interest that exist among us and our chief executive officer, president and Kitchin Hospitality. In addition to his positions with and stock ownership interest
in us, Thomas W. Kitchin, our chairman and chief executive officer, and his family members are the owners of Kitchin Hospitality, which constructs, conducts capital improvements and operates all of the Inns and pays and allocates all of our
administrative overhead expenses. Craig Kitchin, our president and chief financial officer, is the son of Thomas W. Kitchin, and is a beneficial owner of Kitchin Hospitality. These relationships create conflicts of interest in our dealings with
Kitchin Hospitality under the master leases and the various construction agreements, and with regard to allocation and payment of our overhead expenses. In that regard, the master leases, the form of the construction agreements and the cost
reimbursement agreement under which Kitchin Hospitality pays and allocates our overhead were not negotiated on an arms-length basis but are reviewed and approved by the independent members of our board. The independent members of the board
engaged an outside consultant to advise them on the reasonableness of the prices and terms of the construction agreements.



We depend exclusively on Kitchin Hospitality for lease revenues. Certain rules relating to the qualification of REITs prohibit us
from operating the Inns other than by forming a taxable REIT subsidiary and hiring an independent contractor. Rather than operating the Inns ourselves, we have leased the Inns to Kitchin Hospitality. As a result, we depend exclusively on Kitchin
Hospitality for lease revenues. Kitchin Hospitalitys obligations under the master leases are unsecured. Kitchin Hospitality has a limited net worth and has very limited resources to perform certain of its financial obligations under the master
leases. These include indemnifying us against various claims, damages and losses and making payments of rent.



Also, under the master leases, Kitchin Hospitality controls the daily operations of the Inns and we have no ability to participate in
those decisions. Although our management personnel also manage Kitchin Hospitality, we technically have no direct authority to control the activities of Kitchin Hospitality. The master leases limit us to seeking redress only if Kitchin Hospitality
violates the lease terms, and then only to the extent of the remedies set forth in the master leases. Those remedies include our ability to terminate the master leases upon certain limited events of default, including Kitchin Hospitalitys
failure to pay rent.



We will need to obtain
additional debt financing on favorable terms.We will need to refinance mortgage indebtedness of existing mortgage notes as they mature. We also may need to borrow funds to pay the costs of replacement and refurbishment of furniture, fixtures
and equipment of the Inns that we are required to pay under the



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master leases. Additionally, in recent years the amounts of our dividend distributions have exceeded our
cash available for distribution which could limit our ability to reduce our overall level of indebtedness out of our cash flow. We are not certain that we will be able to obtain this financing, either through commercial borrowings or the issuance of
corporate debt securities. If we are able to borrow needed funds, we may not be able to continue to meet our debt service obligations or to make dividend distributions at the current level. To the extent that we cannot, we risk the loss of some or
all of our assets, including the Inns, to foreclosure, or face difficulties meeting the REIT income distribution requirements.



Interest rate increases will increase our cost of current and future debt.A significant portion of our indebtedness is subject to
adjustable interest rates and is secured by a substantial number of our operating assets. We anticipate that our future borrowings will be at interest rates which adjust with certain indices. Therefore, our cost of financing will vary subject to
events beyond our control. While interest rates have declined markedly in the past year, changes in economic conditions could result in higher interest rates which would increase debt service requirements on floating rate debt and could reduce cash
available for distribution. Adverse economic conditions could also cause the terms on which borrowings are available to us to be unfavorable. In those circumstances, if we needed capital to repay indebtedness, we could be required to sell one or
more Inns at times which might not permit realization of the maximum return on our investment.



Cross-collateralization of the Inns increases our risk of loss. A significant number of our current loan agreements provide for cross-collateralization and cross-default with respect to our
debt, and future loan agreements will likely contain similar provisions. The results of a cross-default provision are that all of the loans with this provision effectively secure repayment of our other loans and a default on one loan results in a
default on the other loans. In general, these provisions in our loans may place our assets at a greater risk of foreclosure.



The foreclosure of a mortgage on an Inn could have material adverse tax effects on us. If a mortgage lender foreclosed on an Inn to
enforce its lien in satisfaction of non-recourse debt, we might be required to recognize income. If the amount of the debt discharged exceeded that propertys fair market value, the amount of debt discharge income to be recognized would be
equal to the excess of the amount of such debt over the fair market value of the property. In addition, we would recognize a capital gain to the extent, if any, that the fair market value of the property exceeded our basis in it. We also could
recognize a gain if a mortgage lender foreclosed on a recourse debt. The debt discharge income would be subject to the 90% distribution requirement described below under the headingTaxation of JamesonAnnual Distribution Requirements,
even though we would receive no cash with which to make a distribution.



Debt repayment terms could reduce our ability to make cash distributions. If our debt service obligations continue to be based primarily on 15- to 20-year amortizations, the portion of our cash flow necessary to make
principal payments on obligations to finance future Inns may exceed the cost recovery deductions we can take on our federal income tax return, which are based on 39-year useful lives. As a result, our cash available for distribution to our
shareholders may not be adequate to allow distribution of 90% of our taxable income. In that case, we might be forced to borrow to fund a distribution to shareholders. If we were unable to borrow the money, and as a result did not make the requisite
distribution, our status as a REIT would be jeopardized.



We could become more highly leveraged which would increase our debt service requirements and our risk of default. We currently have a policy of limiting our outstanding indebtedness for new construction, expansions and
refinancings to 65% of the aggregate value of the Inns based on the most recent appraisals obtained on the Inns. However, our organizational documents do not limit the amount of indebtedness that we may incur. Accordingly, our Board of Directors
could change the current policies and we could become more highly leveraged. This would increase our debt service requirements and also the risk of us defaulting on our obligations. An increase in our debt service requirements could adversely affect
our financial condition and results of operations, as well as our ability to make dividend distributions to our shareholders. This could, as a result, jeopardize our status as a REIT. SeeTaxation of Jameson, below.



Our lack of industry diversification makes us more
vulnerable to economic downturns. We currently, and intend in the future to, invest only in Inns and billboards. This concentration of our investments in narrow segments of a single industry makes us more vulnerable to adverse effects of
occurrences such as economic downturns. A weakness in the economy could have a more significant effect on the operation of the Inns and, therefore, on lease revenues and cash available for distribution than if our investments were more economically
diverse.



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The
Inns geographic concentration increases our risks from local and regional economic downturns and other events. All currently operating Jameson Inns are located in the Southeast and approximately 18% of our Jameson Inns rooms are
located in Georgia. All Signature Inns are in the Midwest and approximately 54% of Signature Inns rooms are located in Indiana. For the foreseeable future we will continue to restrict ownership of Inns to those two regions of the country. This
geographic concentration makes us more vulnerable to local and regional occurrences such as economic downturns, seasonal factors and natural disasters. Any of these could adversely affect our lease revenues and cash available for distribution.



We rely heavily on the services of Thomas W.
Kitchin. We and Kitchin Hospitality have relied and expect to continue to rely heavily upon the services and expertise of Thomas W. Kitchin, our chairman and chief executive officer and the chief executive officer and manager of Kitchin
Hospitality, for strategic business direction. In addition, certain of our loan agreements provide for a default upon a change of management. The occurrence of any event which would cause us to lose the services of Mr. Kitchin could have a material
adverse effect on us.



Shares issued under our
stock incentive plans could dilute shareholders investments.We maintain certain stock option and stock grant plans to provide incentive compensation to our directors, officers and key employees and to those of Kitchin Hospitality. The
availability for resale of shares of our common stock issued or issuable under our stock incentive plans may depress the market price of our common stock. In addition, to the extent stock options and other incentive awards which may be granted under
our stock inventive plans vest and are exercised at prices below the net book value of our common stock, the resulting issuance of shares of our common stock will cause an immediate dilution of the interests of our other shareholders.



Rising interest rates and limited trading volume may
depress the price of our capital stock.An increase in market interest rates or a further decline in the dividend rates paid on our stock may result in higher yields on other financial instruments than our shareholders realize from distributions
and dividends paid on our common and preferred stock. This could adversely affect the market price of our common and preferred stock. In addition, the trading volume of equity interests in REITs is generally not as high as in equity interests in
other entities. Accordingly, our status as a REIT may also adversely affect the trading volume of shares of our common and preferred stock. This would reduce the liquidity of an investment in Jameson.



Our corporate documents have certain anti-takeover
provisions that tend to reduce the likelihood of our acquisition by another company. Certain provisions of our articles of incorporation and bylaws may have the effect of discouraging a third party from making an acquisition proposal for us
without the approval of our Board of Directors. This will tend to reduce the likelihood of a change in control of Jameson, even when the holders of our stock could have the opportunity to realize a premium over the then prevailing market prices. For
example, a provision of our articles of incorporation creates our staggered Board. Under that provision, our Board of Directors is made up of three classes of directors with staggered terms of office. Directors for each class are elected for a
three-year term upon the expiration of their then current class term. This makes it more difficult for our shareholders to change control of Jameson even if a change of control were in the shareholders interest. In addition, to comply with the
various restrictions imposed on REITs, our articles of incorporation contain a provision limiting the amount of our voting stock which a shareholder or group of shareholders may own. This limit may also have the effect of precluding an acquisition
of control of Jameson without the approval of our Board of Directors.



Our articles of incorporation also authorize the Board of Directors to issue up to 10,000,000 shares of preferred stock and to establish the preferences and rights of any shares so issued. Accordingly, our Board of Directors
is authorized, without shareholder approval, to issue preferred stock with distribution, dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of shares of our common
stock. Issuance of preferred stock could have the effect of delaying or preventing a change of control of Jameson even if a change of control were in our shareholders interest. To date, our Board has approved the issuance of the 9.25% Series A
Cumulative Preferred Stock (Series A Preferred Stock) and the $1.70 Series S Cumulative Convertible Preferred Stock (Series S Preferred Stock) totaling 3,528,727 shares, of which 64,500 shares of the Series S Preferred Stock
were converted during 2000 into our common stock.



6



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We could
make changes in our investment and financing policies which could adversely affect our financial condition and/or results of operations. Our Board of Directors determines our investment and financing policies and our policies with respect to
certain other activities, including growth, debt capitalization, distributions, operating policies and our qualification as a REIT. Among other things, our Board of Directors could make financing decisions which could result in the creation of
interests in Jameson and/or the Inns with priority over the interests of the shareholders, and/or make equity investments in concerns with debt superior to our equity interest. Our Board of Directors has no present intention to amend or revise these
policies. However, except with respect to our qualification as a REIT, our Board of Directors may do so at any time without the approval of the shareholders. Any decision by our Board of Directors to relinquish our status as a REIT is subject to the
approval of a majority of our voting stock present at a meeting of our shareholders. A change in these policies could adversely affect our financial condition or results of operations.



Risks of Hotel Investments Generally



The following are risks which affect hotel investments
generally which could significantly affect our results of operations.



General economic and regulatory conditions in the hotel industry will affect our business. Our ownership of the Inns is subject to varying degrees of risk generally inherent in the ownership and operation of real
property and, in particular, hotels. Our ownership of the Inns may be adversely affected by a number of factors, including:



| |  |  | the national, regional or local economic climate (which may be adversely impacted by plant closings, industry slowdowns, inflation and other factors);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact of geo-political conflicts, terrorist attacks and the perceived possibility of future attacks and the related impact on the travel and the lodging
industry;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | local hotel market conditions (such as an oversupply of guest rooms);
| | - |  | ---------------------------------------------------------------------



| |  |  | changes in governmental regulations, zoning or tax laws;
| | - |  | --------------------------------------------------------



| |  |  | operating cost increases such as rising natural gas, utility expense, labor problems, potential environmental or other legal liabilities; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increases in short-term interest rates.
| | - |  | ---------------------------------------



We face significant competition and the supply of hotel rooms is growing faster than demand in some of the markets in which Inns are
located. A strong national economy and readily available debt and equity financing during the mid and late 1990s and early 2000s prompted the construction of a significant number of new hotels and motels in certain markets where we operate.
Demand for lodging in the travel industry, however, has generally not kept up with the growth in the supply of rooms. As a result, occupancy rates for hotels, including the Inns, have tended to decline, most notably after the September 11, 2001
terrorist attacks and ongoing geo-political conflicts. This condition may continue in the foreseeable future and may continue to have a negative impact on our results of operations. In addition, there are numerous hotels, including those that are
part of major chains with substantial advertising budgets, national reservation systems, marketing programs and greater name recognition than we have, that compete with the Inns in attracting travelers. Further, many of the Inns are located in
smaller communities where the entry of even one additional competitor into the market may materially affect the financial performance of our Inn in that community. In some of the markets where our Inns are located, additional hotel rooms are
currently under construction.



We incur
significant renovation and refurbishment costs. Hotels in general, including the Inns, have an ongoing need for renovation and refurbishment. We have adopted a policy of maintaining sufficient cash or available borrowings to fund expenditures
for replacement and refurbishment of furniture, fixtures and equipment for the Inns up to an amount equal to 4% of Kitchin Hospitalitys total aggregate room revenues since July 1, 1995, less the amounts actually expended since that date.
However, our expenditures for these purposes have historically exceeded this amount.



7



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We may not
be adequately insured. The ownership of hotel properties presents risks of liability resulting from injuries to guests and resulting litigation. Under the terms of the master leases, we carry comprehensive liability, fire, extended coverage,
rental loss and business interruption insurance covering all of the Inns with policy specifications and insured limits customarily carried for similar properties. However, our insurance coverage could be insufficient to fully protect our business
and assets from all claims or liabilities, including environmental liabilities, especially after the September 11, 2001 terrorist attacks. Further, we may not always be able to obtain additional insurance at commercially reasonable rates. In the
event that losses or claims are beyond the limits or scope of our insurance coverage, our business and assets could be materially adversely affected. In addition, certain types of losses (such as certain environmental liabilities) are not generally
insured because they are either uninsurable or not economically insurable. If an uninsured loss or a loss in excess of insured limits occurs, we could lose our capital invested in the affected Inn, as well as anticipated future revenues from that
Inn, while remaining obligated for any mortgage indebtedness or other financial obligations related to that Inn. Any such loss could have a material adverse effect on our financial condition and results of operations.



We must comply with the Americans with Disabilities
Act. The Americans with Disabilities Act of 1990 (the ADA) requires that all public accommodations meet certain federal requirements related to access and use by disabled persons. If we were required to make modifications to comply
with the ADA, our ability to make expected distributions to our shareholders could be adversely affected. In addition to remedial costs, noncompliance with the ADA could result in imposition of fines or an award of damages in private litigation.



Our business is subject to seasonal
fluctuations. The hotel industry is seasonal in nature. Hotel revenues are generally greater in the second and third calendar quarters than in the first and fourth quarters. This seasonality will cause quarterly fluctuations in our lease
revenues.



Risks of Real Estate Investments Generally



The following are risks which are inherent in
real estate investments generally and which could also significantly impact our results of operations.



Real estate investments, including the Inns, are typically very illiquid.Equity real estate investments, including our investments
in the Inns, are relatively illiquid. The illiquid nature of our investment in the Inns is further increased by the location of many of the Inns in smaller communities. As a result, our ability to sell or otherwise dispose of any Inn in response to
changes in economic or other conditions, or if necessitated by the need to fund a required distribution to shareholders, may be limited.



Environmental laws and regulations could increase our costs or reduce the value of one or more of the Inns. Under various federal,
state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. These laws
often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of hazardous or toxic substances, or the failure to properly remediate the
property, may adversely affect the owners ability to borrow using that real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation
of those substances at the disposal or treatment facility, whether or not that facility is owned or operated by that person. We cannot be certain that



| |  |  | there are no material claims or liabilities related to our ownership of the Inns,
| | - |  | ---------------------------------------------------------------------------------



| |  |  | future laws, ordinances or regulations will not impose any material environmental liability on us with respect to our Inns or land held for sale, and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the current environmental condition of the Inns will not be affected by operation of the Inns, by the condition of properties in the vicinity of the Inns (such as
the presence of underground storage tanks) or by third parties.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Under the
terms of the master leases, we indemnify Kitchin Hospitality against environmental liabilities, except those caused by the acts or negligent failures of Kitchin Hospitality. In addition, the master leases provide that Kitchin Hospitality will
indemnify us against environmental liabilities caused by Kitchin Hospitalitys acts or negligent failures. Kitchin Hospitalitys financial condition may limit the value of its indemnity and, in any event, the indemnity will not apply to or
protect us against past unknown violations and related liabilities.



Tax Risks



The following
risks relate to our status as a REIT under federal income tax laws.



Failure to qualify as a REIT would reduce the amount of cash available to distribute to our shareholders. We intend to continue to operate in a manner so as to qualify as a REIT under the Internal Revenue Code. A REIT
generally is not taxed at the corporate level on income it currently distributes to its shareholders, so long as it distributes at least 90% of its taxable income and satisfies certain other technical and complex requirements. Because our
qualification as a REIT in our current and future taxable years depends upon our meeting the requirements of the Internal Revenue Code in future periods, we cannot be certain that we will continue to qualify as a REIT. If, in any taxable year, we
were to fail to qualify as a REIT for federal income tax purposes, we would not be allowed a deduction for distributions to shareholders in computing taxable income and would be subject to federal income tax (including any applicable alternative
minimum tax) on our taxable income at regular corporate rates. In addition, unless entitled to relief under certain statutory provisions, we would be disqualified from treatment as a REIT for federal income tax purposes for the four taxable years
following the year during which qualification was lost. The additional tax liability resulting from the failure to so qualify would significantly reduce the amount of funds available for distribution to our shareholders.



We may need to borrow funds in order to make the
distributions to shareholders which the tax laws require. To obtain the favorable tax treatment associated with REITs, we generally will be required each year to distribute to our shareholders at least 90% of our net taxable income (excluding
any net capital gain). In addition, we will be subject to tax on our undistributed net taxable income and net capital gain, and a 4% nondeductible excise tax on the amount, if any, by which certain distributions which we pay with respect to any
calendar year are less than the sum of 85% of our ordinary net income plus 95% of our capital gain net income for the calendar year.



We intend to make distributions to our shareholders to comply with the distribution provisions of the Internal Revenue Code and to avoid
or minimize income taxes and the nondeductible excise tax. Our income and cash flow will consist primarily of the rents received from Kitchin Hospitality under the master leases. Differences in timing between the receipt of income and the payment of
expenses in arriving at our taxable income and the effect of required debt amortization payments could make it necessary for us to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax
benefits associated with qualifying as a REIT even if we believe that then prevailing market conditions are not generally favorable for such borrowings or that such borrowings would not be advisable in the absence of such tax considerations.



Distributions are determined by our Board of
Directors and depend on a number of factors, including the amount of cash available for distribution, our financial condition, any decision to reinvest rather than to distribute such funds, our capital expenditures, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code and such other factors as our Board of Directors considers important. Accordingly, we cannot provide any assurance that we will be able to maintain our required distribution rate.
SeeTaxation of JamesonRequirements for Qualification andAnnual Distribution Requirements, below.



The Master Leases



We entered into master leases with Kitchin Hospitality covering all of the completed and operating Jameson Inns (the Jameson
Lease) and a separate master lease covering the Signature Inns (the Signature Lease). New Inns which we develop during the term of the master leases will become subject to the respective master leases upon their completion of
construction. The Jameson Lease and the Signature Lease are substantially the same except regarding the term and the calculation of rent. The following is a summary description of the material terms and conditions of both the Jameson Lease and the
Signature Lease.



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Term.
The Jameson Lease and Signature Lease terms expire on December 31, 2011, and December 31, 2012, respectively, subject to earlier termination upon the occurrence of certain events.



Rent. During the terms of each of the master leases, Kitchin Hospitality is obligated to pay to us
base rent calculated on the number of rooms available for rent on the first day of the month and, when applicable under the formula described below, percentage rent based on room revenues. In general, percentage rent is calculated by multiplying
average daily per room rental revenues for all of the Inns under each master lease by certain percentages and then subtracting the amount of the base rent paid for the same period.



Under the Jameson Lease, base rent is payable monthly and equals $264 per room per month multiplied by the
number of rooms available to rent at the beginning of the month. Percentage rent is payable quarterly and, at January 1, 2003, is based on the following formula:



39% of the first $23.57 of average daily per room rental revenues; plus



65% of all additional average daily per room
rental revenues; less



100% of
the base rent paid for the same period.



Under
the Signature Lease, base rent is $394 per room per month multiplied by the number of rooms available to rent at the beginning of the month. Percentage rent is payable quarterly and, at January 1, 2003, is based on the following formula:



37% of the first $39.55 of
average daily per room rental revenues; plus



65% of the next $10.00 of average daily per room rental revenues; plus



70% of all additional average daily per room rental revenues; less



100% of base rent paid for the same period.



Percentage rent is based on the total number of
rooms available to rent during the period, rather than the number of rooms available to rent at the beginning of each month. The total base rent plus percentage rent payable by Kitchin Hospitality under the Jameson Lease is limited to 47% of room
revenues. For purposes of calculating base rent and percentage rent, each master lease under which we or one of our subsidiaries is lessor is treated as a separate Jameson Lease or Signature Lease; that is, only the number of rooms and amount of
room revenue attributable to Inns under a particular master lease are considered when determining the amount of base rent and percentage rent Kitchin Hospitality is obligated to pay under that master lease.



On January 1, 2004, the $23.57 amount referred to above under
the Jameson Lease and the $39.55 amount referred to under the Signature Lease will be increased based on the percentage increase in the Consumer Price Index for all Urban Consumers published by the U.S. Department of Labor Bureau of Labor Statistics
for the year ended December 31, 2003. Similar adjustments will be made on each subsequent January 1 for the year then beginning based on the changes the Consumer Price Index experienced over the most recently completed calendar year.



Average daily per room rental revenues (REVPAR) are determined
by dividing room revenues realized by Kitchin Hospitality over any given period by the sum of the number of rooms available for rent on each day during the period. Room revenues as defined in the Jameson Lease include revenues from telephone
charges, vending machine payments and other miscellaneous revenues after deducting all (i) credits, rebates and refunds, (ii) sales taxes and other excise taxes, and (iii) fees, commissions, charges and other payments made to travel agents,
consortia and global access providers in connection with sales of rooms. Room revenues do not include (i) sales of alcoholic beverages if and to the extent prohibited by laws applicable to the Inns, and (ii) any utility surcharge assessed by the
lessee to guests in connection with the rental of rooms. Room revenues as defined in the Signature Lease are substantially the same as in the Jameson Lease other than an amount representing (iii)above is not deducted under the Signature Lease. On or
before March 1 of each year, Kitchin Hospitality is required to provide a



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calculation of the percentage rent payable for the preceding year, together with a report by the same
independent accounting firm serving as auditors of Jamesons financial statements, on the amount of room revenues and percentage rent. Total rent, including both base rent and percentage rent, which we earned under the Jameson Lease for the
years ended December 31, 2000, 2001 and 2002 was $25.4 million, $28.1 million and $28.0 million, respectively. Total rent, including both base rent and percentage rent we earned under the Signature Lease for the years ended December 31, 2000, 2001
and 2002, was $17.1 million, $14.7 million and $14.1 million, respectively.



Operating Expenses. In addition to paying base rent and, if applicable, percentage rent, the master leases require Kitchin Hospitality to pay all costs and expenses incurred in the operation of
the Inns, including workers compensation insurance premiums. We are responsible for other types of insurance, real and personal property taxes, the costs of replacing or refurbishing furniture, fixtures and equipment, and the maintenance of
structural elements, roofs and underground utilities.



Approval of Master Leases. Our independent directors are members of our Board of Directors who are not also officers or employees of Jameson and who are not affiliated with Kitchin Hospitality. Our independent directors
determined that the master leases, as amended, are fair to us.



Trademarks. Kitchin Hospitality owns the registered trademarks, The Jameson Inn®and Signature Inns®. The master leases require
Kitchin Hospitality to operate the Inns using the trademarks and not to use the trademarks (or license their use to any other parties) for the operation of lodging facilities other than the Inns if we object to the unrelated use. We have consented
to the limited use of the Jameson Inn and Signature Inn trademarks by third parties to operate several of the hotels that we sold. We anticipate that we will continue to authorize the use of these trademarks by additional purchasers if we make
further sales of hotels. We may also authorize the use of these trademarks by other hotels which may be managed by Kitchin Hospitality but in which we will have no financial or other direct economic interest. We have an option to purchase The
Jameson Inn®and Signature Inns®trademarks from Kitchin Hospitality at the end of each master lease or upon the earlier termination of the master lease
with respect to all of the Inns for $25,000 for The Jameson Inn®trademark and
$50,000 for the Signature Inns®trademark. Any acquisition of these trademarks
would be subject to whatever third party rights in them had been granted and we would likely incur substantial additional costs in connection with the termination of the master leases prior to the expiration of its term.



Maintenance and Modifications. Under the master leases,
we are required to maintain the underground utilities and the structural elements of the improvements and the roof of each Inn. Kitchin Hospitality is required, at its expense, to maintain the Inns in good order and repair and to make
non-structural, foreseen and unforeseen, and repairs which may be necessary and appropriate to keep the Inns in good order and repair.



Kitchin Hospitality, at its expense, may make non-capital and capital additions, modifications or improvements to the Inns which do not
significantly alter the character or purposes, or significantly detract from the value or operating efficiencies, of the Inns. Modifications or improvements estimated to cost in excess of $100,000 must be done under the supervision of a qualified
architect, engineer or contractor satisfactory to us and in accordance with plans and specifications which we approve.



All alterations, replacements and improvements are subject to all the terms and provisions of the master leases and become our property of
upon termination of a master lease. In 2002, four expansions of existing Jameson Inns were completed. One additional Jameson Inn expansion is scheduled was completed during January 2003.



Hotels in general, including the Inns, have an ongoing need
for renovation and refurbishment. A significant number of Jameson Inns have been constructed within the past two years and generally do not require any substantial renovation or refurbishment. However, Inns older than two years require periodic
replacement of furniture, fixtures and equipment and the master leases require that we pay the costs of the refurbishment. We have adopted a policy of maintaining sufficient cash or available borrowings to fund expenditures for replacement and
refurbishment of furniture, fixtures and equipment for the Inns up to an amount equal to 4% of Kitchin Hospitalitys total aggregate room revenues since July 1, 1995, less the amounts actually expended since that date. Capital improvements to
the Inns in 2003 will be contracted to Kitchin Hospitality.



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Insurance
and Property Taxes. The master leases provide that we are responsible for paying or reimbursing Kitchin Hospitality for real and personal property taxes as well as for all insurance coverage on the Inns except workers compensation
coverage, which is an obligation of Kitchin Hospitality.



Indemnification. The master leases require Kitchin Hospitality to indemnify us and our affiliates from and against all liabilities, costs and expenses (including reasonable attorneys fees and expenses) incurred by,
imposed upon or asserted against us or our affiliates, on account of, among other things, (1) any accident or injury to person or property on or about the Inns, (2) any misuse by Kitchin Hospitality, or any of its agents, of the leased property, (3)
taxes and assessments in respect of the Inns (other than our real and personal property taxes and income taxes on income attributable to the Inns), or (4) any breach of a master lease by Kitchin Hospitality. The master leases do not, however,
require Kitchin Hospitality to indemnify us against our gross negligence or willful misconduct. We are required to indemnify Kitchin Hospitality against any environmental liabilities other than those caused by the acts or negligent failures of
Kitchin Hospitality (for which Kitchin Hospitality will indemnify us).



Assignment and Subleasing. Under the terms of the master leases, Kitchin Hospitality is not permitted to sublet all or any part of any of the Inns or assign its interest under the master leases, other than to an
affiliate of Kitchin Hospitality controlled by Mr. Kitchin, without the prior written consent of Jameson. No assignment or subletting will release Kitchin Hospitality from any of its obligations under the master leases.



Events of Default. Events of default under the master
leases include, among others, the following:



(1) Kitchin Hospitalitys continuing failure to pay rent for a period of 10 days after receipt by Kitchin Hospitality from us of written notice of nonpayment;



(2) except under certain circumstances, continued failure by Kitchin Hospitality to observe
or perform any other term of the master leases for a period of 30 days after Kitchin Hospitality receives notice from us of the failure;



(3) Kitchin Hospitalitys bankruptcy, insolvency or similar event; and



(4) Kitchin Hospitalitys voluntary
discontinuation of operations at an Inn for more than five days, without our consent, except as a result of damage, destruction or condemnation.



If an event of default occurs and continues beyond any curative period, we have the option of terminating the master leases as to any
individual Inn (which would not affect the master leases as to the remainder of the Inns) or as to all of the Inns by giving Kitchin Hospitality 10 days written notice of the termination date.



Termination of Master Leases on Disposition of Inns. If
we enter into an agreement to sell or otherwise transfer an Inn, we may terminate the applicable master lease as to that Inn. However, if a master lease is terminated as to Inns comprising 25% or more of the total rooms of all of the Inns within a
period of 12 consecutive months, we must compensate Kitchin Hospitality for the loss of its leasehold interest or offer substitute hotels. All of the Inns have been mortgaged to secure our indebtedness. In the event of a foreclosure sale (or
transfer in lieu of foreclosure) of any Inn, the applicable master lease will terminate with respect to that Inn.



Inventory. The master leases require all inventory required in the operation of the Inns to be acquired and replenished by Kitchin
Hospitality. Inventory includes: (1) cleaning supplies, (2) linens, (3) towels and (4) paper goods.



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Plans for 2003



Historically, our business
plan has been to enhance stockholder value by increasing funds from operations and cash available for distribution by developing additional Inns, expanding existing Jameson Inns and participating, through the master leases, in increased room
revenues generated through operation of the Inns by Kitchin Hospitality. For definitions, calculation of funds from operations and cash available for distributions, and related disclosures, see Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations. Due to economic and competitive conditions experienced recently, we have substantially curtailed our plans to develop new Inns and to expand existing Inns. During 2002 we sold three Jameson Inns and one
Signature Inn which were mostly under-performing and which no longer met our investment criteria. We plan on selling additional Jameson and Signature Inns in the future. See Policies and Objectives with Respect to Certain
ActivitiesDispositions.



We also continue
to consider other strategic alternatives as a possible means of growth and increasing shareholder value. These include acquisitions of other properties, business combinations, corporate restructuring, an offering of additional equity securities,
termination of our election to be taxed as a REIT and other alternatives. We have made no decisions or commitments at this time, but we intend to continue to consider these alternatives.



Development of New Inns. We believe that selective opportunities may still exist for the development
of new Jameson Inns in certain markets in the southeastern United States. Although we have no current plans to begin new development of Jameson Inns, we will continue to evaluate opportunities as they arise in targeted communities. At December 31,
2002, we had one twenty-room Jameson Inn under expansion. Additionally, in the first quarter of 2003, we plan to begin converting an existing Signature Inn located in Louisville, KY to a Jameson Inn. We are evaluating plans to convert certain
existing Signature Inns to Jameson Inns, according to our assessment of market demand, cost and other relevant factors.



We have entered into agreements with Best Western to co-brand three Signature Inn hotels to the Best Western flag, and operate as a
Best Western-Signature Inn. We have an option to convert one additional Signature Inn under a similar arrangement with Best Western during 2003. We may consider other re-flagging opportunities in the future although we have no obligation
to do so.



Expansion of Existing Jameson
Inns. We expanded one Jameson Inn in January 2003. We may consider expanding additional existing Jameson Inns if market conditions and other circumstances warrant. To date, we have expanded 43 Jameson Inns. Since Jameson Inns built prior to 1999
were initially constructed with the office and lobby, swimming pool and fitness center on sites generally large enough for future expansions, the incremental cost per room of expansions is lower than for new Inn construction. Accordingly, we have
been able to earn returns on the investment by expanding Jameson Inns in markets with strong room demand. Also, as compared to the development of new Inns, expansion of existing Jameson Inns has been a relatively lower risk growth strategy since we
have an opportunity to assess local room demand and market trends based on our direct experience in developing and owning the existing hotel. We employ substantially the same strategy regarding possible expansion of our currently operating
exterior-corridor Jameson Inns. The sites for new, interior-corridor Jameson Inns, however, and all of the current Signature Inn sites are fully developed and these properties cannot be expanded.



Kitchin Hospitality as Contractor. We anticipate that
Kitchin Hospitality will continue to act as general contractor for any new Inns we build, for expansions, refurbishments and other capital expenditures with respect to existing Jameson Inns and Signature Inns. Each construction contract for a new
Inn or a group of Inns provides for a turnkey price for all work performed under the contract subject to reduction, if Kitchin Hospitalitys profits (as defined in the construction contract) exceed 10%. The contract price excludes the cost of
the land and closing costs, but includes the costs of constructing and equipping the Inns, including interest charges we incur on the associated construction debt during construction and working with Kitchin Hospitality to staff the Inn prior to
opening. Each contract for refurbishment and other capital expenditures provides for us to pay the actual cost of the work plus a 7% contractors fee. An independent architectural firm engaged by the Company reviews each construction contract
and each is also subject to approval by a majority of our independent directors. The average price charged by Kitchin Hospitality for the new Jameson Inn opened during 2002 and the four Jameson Inns expanded in 2002 was approximately $51,375 per
guest room.



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Internal
Growth. Through percentage rent, we can participate in increases in room revenues generated through increases in occupancy rates and average daily room rates or ADR of the Inns by Kitchin Hospitality. Total rent payable under the Jameson Lease,
including base rent and percentage rent, is limited, however, for each calendar year to 47% of Jameson Inn room revenues. Kitchin Hospitality practices market-sensitive pricing, increasing room rates at particular Inns as market conditions in the
specific communities warrant. The Inns general managers receive a significant portion of their compensation based on achieving specified quarterly operating results.



Sales and Marketing. Kitchin Hospitality is responsible for marketing the Inns. It focuses on local
efforts directed to the business community in the city or town where the particular Inn is located. One of the key responsibilities of an Inns general manager is to make sales calls on local chambers of commerce, businesses, factories,
government installations and colleges and universities. The goal of the sales call is to familiarize local business people with the Inn in their community and solicit their recommendation of the Inn to business travelers visiting communities where
Inns are located, including both individual discretionary travelers as well as groups attending family or community events. Kitchin Hospitality employs billboards and other similar types of advertising and has two 800 numbers to
facilitate reservations for the Inns. All Jameson Inns and Signatures have direct links to Global Distribution Systems (GDS) for reservations which also interfaces with major electronic reservation systems such as Sabre, Apollo,
Worldspan, System One and Amadeus. This interface connects the Jameson and Signature Inns with travel agents nationally and internationally. In addition to billboard advertising which Kitchin Hospitality has traditionally utilized and will continue
to utilize, Kitchin Hospitality places advertisements for the Inns in regional and special event publications and in newspapers. Kitchin Hospitality also markets the Inns through the website www.jamesoninns.com.



Competition. The hotel industry remains highly
competitive. Each of the Inns is located in an area that has competing hotels. The number of competitive hotels in a particular area could have a material adverse effect on occupancy, ADR, and revenue per available room, or REVPAR, of the Inns. Many
of our Inns are located in cities and communities in which significant new hotel and motel development has occurred in recent years.



The Inns compete mainly on the basis of price, quality and perceived value. Competition for the Inns is made up primarily of limited
service hotels in the southeastern and midwestern United States operating under national franchises, many of which have greater financial resources than we do, substantial advertising budgets, national reservation systems, marketing programs, guest
reward programs and greater name recognition.



Regulations



Environmental Matters. Under various
federal, state, and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property.
Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances, or the failure to properly
remediate such property, may adversely affect the owners ability to borrow using the real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person.



While we have not incurred any such costs in connection with our ownership of the Inns or land parcels, we may be potentially liable for
such costs. We are not aware of any potential material liability or claims for which we may be responsible. However, we cannot be certain that (1) there are no material claims or liabilities related to real property which we own; (2) future laws,
ordinances or regulations will not impose any material environmental liability on us; or (3) the current environmental condition of the Inns will not be affected by their operations, by the condition of properties in the vicinity of the Inns (such
as the presence of underground storage tanks) or by third parties.



Under the terms of the master leases, we indemnify Kitchin Hospitality against environmental liabilities, except those caused by the acts or negligent failures of Kitchin Hospitality. In addition, the master leases provide
that Kitchin Hospitality will indemnify us against environmental liabilities caused by Kitchin Hospitalitys acts or



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negligent failures, although Kitchin Hospitalitys financial condition may limit the value of such
indemnity and, in any event, such indemnity will not apply to or protect us against past unknown violations and related liabilities. SeeThe Master Leases, above.



We believe that the Inns are in compliance in all material respects with all federal, state and local
ordinances and regulations regarding hazardous or toxic substances and do not anticipate that we will be required in the foreseeable future to expend any material amounts in order to comply with such ordinances and regulations. We have not been
notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of our present or former properties.



Americans with Disabilities Act. Under the Americans
with Disabilities Act of 1990 or the ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. In addition to remedial costs, noncompliance with the ADA could result in imposition
of fines or an award of damages to private litigants. We believe that all existing Inns are substantially in compliance with these requirements and we intend to construct future Inns in accordance with such requirements as well. We have engaged
disabilities consultants at various times to make recommendations regarding compliance of the Inns with the ADA. These consultants submitted reports recommending a number of improvements for access to and use by disabled persons with respect to
certain of the Inns in operation, which improvements were made. We have also incorporated the consultants recommendations into the construction of new Jameson Inns and will continue to do so.



Employees



At December 31, 2002, we employed 10 persons. Our employees are also employees of Kitchin Hospitality. Under
the cost reimbursement agreement between Jameson and Kitchin Hospitality, we reimburse Kitchin Hospitality for the time and for other general and administrative costs that these shared employees spend on our business. For the year ended December 31,
2002, our reimbursement to Kitchin Hospitality totaled approximately $1,574,000. None of our or Kitchin Hospitalitys employees is represented by a union or labor organization, nor have our or Kitchin Hospitalitys operations ever been
interrupted by a work stoppage. We consider relations with our employees to be excellent.



Kitchin Hospitality. Kitchin Hospitality leases and operates all completed Inns under the terms of the master leases. SeeThe Master Leases, above. Kitchin Hospitality has also acted as
contractor for the initial construction and expansion of all Jameson Inns. We expect Kitchin Hospitality to serve as construction contractor for any further expansions of Jameson Inns, for construction of all new Jameson Inns and Signature Inns, and
for renovation and refurbishment of all of our Inns.



The names and certain other information concerning the executive officers of Kitchin Hospitality are set forth below. At December 31, 2002, Kitchin Hospitality had approximately 2,400 full- and part-time employees engaged in
day-to-day management, marketing and construction of the Inns.



Kitchin Hospitality has a limited net worth of $631,000 at December 31, 2002. The audited financial statements of Kitchin Hospitality appear elsewhere in this annual report and should be referred to for additional financial
information concerning Kitchin Hospitality. Kitchin Hospitality may engage in activities other than as lessee and construction contractor of the Inns, subject to restrictions under the master leases.



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The executive officers and key employees of Kitchin Hospitality are the following:



|Name              |  | Position                                                 
|----------------- |  | ---------------------------------------------------------
|Thomas W. Kitchin |  | President and Chief Executive Officer                    
|Craig R. Kitchin  |  | Vice PresidentFinance and Chief Financial Officer       
|Steven A. Curlee  |  | Vice PresidentLegal, General Counsel, Secretary         
|William D. Walker |  | Vice PresidentDevelopment                               
|Martin D. Brew    |  | Treasurer, Chief Accounting Officer                      
|Joseph H. Rubin   |  | President of Kitchin Development and Construction Company
|Gregory W. Winey  |  | Vice PresidentHotel Operations                          



Set
forth below is certain information concerning Kitchin Hospitalitys executive officers, managers and key employees.



Thomas W. Kitchin is the founder, and owner with other family members, of Kitchin Hospitality. He is also the founder and has been an
officer and director of Jameson since its incorporation in 1988. Prior to founding Jameson and the predecessors of Kitchin Hospitality, he spent 10 years in the oil and gas industry and served as chief executive officer of an oil and gas company
listed on the American Stock Exchange. Mr. Kitchin serves as a director of the Georgia State University Cecil B. Day School of Hospitality Administration; director of a private school; and director of the Northside Hospital Advisory Board. In
addition, he has served on the board of directors of several banks and oil companies and numerous other civic, charitable and social service agencies. Mr. Kitchin is the father of Craig R. Kitchin, president and chief financial officer of Jameson.



Craig R. Kitchin has been an officer of Kitchin
Hospitality and its predecessors since its inception. Also an officer of Jameson, he became chief financial officer of Jameson in February 1994, vice presidentfinance in November 1997, and president in November 1998. He joined Jameson as its
controller and treasurer on June 15, 1992, upon receiving his M.B.A. degree from the University of Chicago with concentrations in accounting and finance. Before attending the University of Chicago, he was a financial analyst with FMC Corporation in
Santa Clara, California, from 1989 to 1990. Mr. Kitchin graduated from Santa Clara University with a B.S. degree in finance in 1989. Craig Kitchin is the son of Thomas W. Kitchin, the chairman and chief executive officer of Jameson.



Steven A. Curlee has been an officer of Kitchin Hospitality
and its predecessors since their inception. Also an officer of Jameson, he became general counsel and secretary of Jameson on January 1, 1993 and vice presidentlegal in November 1997. From April 1985 to July 1992, he was general counsel of an
oil and gas company listed on the American Stock Exchange. Prior thereto, he was engaged in the private practice of law in Tulsa, Oklahoma for five years. From 1976 to 1980, Mr. Curlee served on active duty in the U.S. Navy as a Judge Advocate. Mr.
Curlee received a B.A. degree in political science and his J.D. from the University of Arkansas. He received a Master of Law in Taxation degree from Georgetown University. Mr. Curlee is admitted to practice law in Arkansas, the District of Columbia,
Oklahoma, Texas and Georgia.



William D. Walker
is vice presidentdevelopment of Jameson as well as of Kitchin Hospitality. He has been an officer of Jameson since its incorporation in 1988 and served as a director from 1988 through October 29, 1993. He has been an officer of Kitchin
Hospitality and its predecessors since their inception. Prior to joining us, he worked in various financial management positions for twelve years. Mr. Walker received a B.B.A. degree in finance from Texas Tech University in 1975.



Martin D. Brew has been an officer of Kitchin Hospitality and
of Jameson since the Signature acquisition in May 1999. Prior to joining Kitchin Hospitality, he was employed by Signature Inns for 13 years, first as controller and later as treasurer. Mr. Brew was also employed by KPMG LLP prior to his employment
with Signature Inns. Mr. Brew has a B. S. degree in business from Indiana University and is a Certified Public Accountant.



Joseph H. Rubin became president of Kitchin Development and Construction Company, the construction division of Kitchin Hospitality in
October 1999. Prior to joining Kitchin Hospitality, Mr. Rubin was president and



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chief executive officer of Abrams Industries, Inc., an Atlanta based commercial real estate developer and
construction company, where he had been employed since 1979. Mr. Rubin earned a B.A. degree in economics at Guilford College and a J.D. degree at the University of North Carolina. He is a Certified Public Accountant and is licensed to practice law
in Georgia and North Carolina.



Gregory W. Winey
is Vice PresidentHotel Operations of Kitchin Hospitality. He joined Kitchin Hospitality in April 1998 as a regional manager supervising the operations of 17 Jameson Inns. In October 1998 he became the director of operations supervising the
operations of all Jameson Inns. Before joining Kitchin Hospitality, he was with Promus Hotel Corporation from May 1991 to December 1997 serving in several capacities in hotel operations, most recently as a senior area manager overseeing the daily
operations of 17 hotel properties, including Hampton Inns, Hampton Inn & Suites and Homewood Hotels.



Policies and Objectives with Respect to Certain Activities



The following is a discussion of our investment objectives and policies, financing policies and policies with respect to certain other
activities. These policies may be amended or revised from time to time at the sole discretion of our Board of Directors. We can give no assurance that we will attain our investment objectives or that the value of Jameson will not decrease.



Investment Objectives and Policies. Our
investment objective is to provide quarterly cash distributions and achieve long-term capital appreciation through increases in cash flow and the value of Jameson. We will seek to accomplish these objectives through the ownership and leasing of the
Inns to Kitchin Hospitality, increases in the Inns room revenues and selective development and expansion of Inns. A key criterion for new investments will be the opportunity they offer for growth in funds from operations and cash available for
distribution. For definitions, calculation of funds from operations and cash available from operations and related disclosures, see Item 7Jameson Managements Discussion and Analysis of Financial Condition and Results of Operations.



We currently intend to invest only in Jameson
Inns and Signature Inns, although we may also hold temporary cash investments from time to time pending investment or distribution to stockholders. We may purchase or lease properties for long-term investment, expand and improve properties, or sell
such properties, in whole or in part, when circumstances warrant. Equity investments may be subject to existing mortgage financing and other indebtedness which have priority over our equity interest.



While we emphasize equity real estate investments, we may, in
our discretion, invest in mortgages, stock of other REITs and other real estate interests. Mortgage investments may include participating or convertible mortgages. However, we have not invested previously in mortgages or stock of other REITs, and do
not presently intend to do so.



Dispositions. During 2002, we sold three 40-room Jameson Inns. One Signature Inn located in Cincinnati, Ohio was sold in February 2002. One additional Signature Inn was classified as held for sale at December 31, 2002 and was
sold in January 2003. While we have presently made no commitments to sell any other Jameson Inns or Signature Inns we may identify additional Inns to dispose of which do not meet our investment criteria. We do not expect the combined sales of these
properties to result in a significant gain or loss.



Financing. Our policy has been to finance all of the costs of developing new Inns and expanding existing Inns. Indebtedness we incur may be in the form of bank borrowings, secured and unsecured, and publicly and privately
placed debt instruments. Indebtedness may be recourse to all or any part of our Inns or may be limited to the Inn to which the indebtedness relates. We may also use the proceeds from any of our borrowings for the payment of distributions, for
working capital, to refinance existing indebtedness or to finance acquisitions, expansions or development of new Inns. Most of our current mortgage indebtedness is with recourse to us.



At December 31, 2002, we had outstanding an aggregate of approximately $222.8 million of mortgage debt,
including $489,000 in construction debt drawn for the one expansion in progress. For this Inn expansion in progress, the construction debt provides for additional borrowings of $239,000 and is secured by this expansion.



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While our
organizational documents do not limit the amount or percentage of indebtedness that we may incur, we currently have a policy of limiting outstanding indebtedness for new construction, expansions and refinancings to 65% of the aggregate value of the
Inns based on the most recent appraisals obtained on the Inns. Our Board of Directors could change our current policies and we could become more highly leveraged, resulting in an increased risk of default on our obligations and in an increase in
debt service requirements. This increase could adversely affect our financial condition and results of operations, our ability to make dividend distributions to our stockholders and could, as a result, jeopardize our status as a REIT.



We may attempt to raise additional equity capital for working
capital purposes or the repayment of indebtedness. In the event we desire to raise additional equity capital, our Board of Directors has the authority, without stockholder approval, to issue additional shares of Jameson common stock or other capital
stock of Jameson in any manner (and on such terms and for such consideration) it deems appropriate, including in exchange for property. Existing stockholders would have no preemptive right to purchase shares issued in any offering, and any such
offering might cause a dilution of a stockholders investment in Jameson.



Working Capital Reserves.Our policy is to maintain working capital reserves (and when not sufficient, access to borrowings) in amounts that our Board of Directors determines to be adequate to
meet normal contingencies in connection with the operation of our business and investments.



Policy Regarding Capital Expenditures. In July 1995, we adopted a policy of maintaining cash or sufficient access to borrowings equal to 4% of the Jameson Inns aggregate room revenues
since July 1, 1995, less amounts actually spent from that date forward for capital expenditures. This policy extends to the Signature Inns acquired in May 1999. For the period July 1, 1995 through December 31, 2002, our actual expenditures for these
purposes have exceeded these amounts as 4% of room revenues equaled $17.9 million and we expended $33.5 million on items during that same period.



Other Policies. We intend to operate in a manner that will not subject us to regulation under the Investment Company Act of 1940.
We do not intend to (1) invest in the securities of other issuers for the purpose of exercising control over such issuer, (2) underwrite securities of other issuers or (3) actively trade in loans or other investments.



We may make investments other than as previously described,
although we presently have no plans to do so.



During the past five years, except in connection with the acquisition of billboard assets from Kitchin Hospitality and the Signature merger, we have not issued Jameson common stock or any other securities in exchange for property,
nor have we reacquired any of our common stock. Options held by officers and employees of the Company and Kitchin Hospitality to purchase 604,933 shares of our common stock were canceled voluntarily in 2002. Jameson has authority to issue common
stock and other securities and to reacquire our common stock and other securities and may do so in the future. During the last five years, we have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers,
and we do not intend to do so in the future. Our Board of Directors may review and modify our policies with respect to such activities from time to time without the vote of the stockholders.



At all times, we intend to make investments in such a manner
as to be consistent with the requirements of the Internal Revenue Code to qualify as a REIT unless our Board of Directors, with the consent of our stockholders, determines to revoke our REIT election.



Conflicts of Interest. Because of the ownership by
Thomas W. Kitchin in and positions with Jameson and Kitchin Hospitality, there are inherent conflicts of interest in the construction of new Jameson Inns and Signature Inns and the expansion, refurbishment and other capital expenditures relating to
existing Inns by Kitchin Hospitality. Conflicts of interest also exist in our dealings with Kitchin Hospitality under the master leases, the construction and refurbishing contracts and under the cost reimbursement agreement between the two
companies. SeeThe Master Leases;Growth Plans for 2003; Kitchin Hospitality as Contractor;and Employees. In an effort to reduce the conflicts of interest, we have a policy of requiring that any material transaction or arrangement
between us and Kitchin Hospitality, or an affiliate of either, is subject to approval by a majority of our independent directors.



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Our Board of
Directors also has a policy that any material contract or transaction between us and one or more of our directors or officers, or between us and any other entity in which one or more of our directors or officers are directors or officers or have a
financial interest must be approved by a majority of either our independent directors or disinterested shareholders after the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to them.
The Board of Directors may change this policy without the consent of the shareholders upon the affirmative vote of a majority of our independent directors.



Taxation of Jameson



We made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our taxable year
beginning January 1, 1994. We believe that commencing with the 1994 taxable year, we were organized and we have operated in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code. However, we cannot guarantee that we have
operated in a manner, or will operate in a manner in the future, so as to remain qualified as a REIT.



The sections of the Internal Revenue Code relating to qualification and operation as a REIT are highly technical and complex. The
following discussion summarizes the material aspects of the Internal Revenue Code sections that govern the federal income tax treatment of a REIT and its shareholders. Because it is a summary, it does not cover all aspects of this subject. To
understand all of the rules and regulations applicable to us as a REIT, you should refer to the applicable Internal Revenue Code provisions, Treasury Regulations and administrative and judicial interpretations thereof.



As long as we qualify for taxation as a REIT, we generally
will not be subject to federal corporate income tax on our net income that is currently distributed to our shareholders. This treatment substantially eliminates the double taxation (at the corporate and shareholder levels) that generally
results from investment in a corporation. However, we will be subject to federal income or excise tax as follows: First, we will be taxed at regular corporate rates on our REIT taxable income, which is defined generally as taxable income (subject to
certain adjustments), including net capital gains, less dividends (or certain deemed dividends) paid to shareholders. Second, we will generally be subject to the alternative minimum tax if REIT taxable income plus any tax adjustments and
preferences is greater than dividends paid to shareholders. Third, if we have (1) net income from the sale or other disposition of foreclosure property which is held primarily for sale to customers in the ordinary course of a trade of
business or (2) other non-qualifying net income from foreclosure property, we will be subject to tax at the highest corporate rate on such income. Fourth, if we have net income from prohibited transactions (generally certain sales or other
dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), this income will be subject to a 100% tax. Fifth, if we should fail to satisfy the 75% or 95% gross income tests
discussed below and have nonetheless maintained our qualification as a REIT because certain other requirements have been met, we will be subject to a 100% tax on the net income attributable to the greater of the amount by which we fail the 75% or
95% gross income tests. Sixth, generally, if we fail to distribute to our shareholders during each calendar year an amount equal to our required distribution, we will be subject to a 4% nondeductible excise tax on the excess of such required
distribution amount over the amount actually distributed for the year. The amount of required distribution is equal to the sum of (1) 85% of our ordinary income for such year, (2) 95% of our REIT capital gain net income for such year and (3) the
amount, if any, of the required distribution for the previous year over the amount actually distributed for that year.



In addition, if during the 10-year period (the Recognition Period) beginning on the first day of the first taxable year for
which we qualified as a REIT, we recognize gain on the disposition of any asset held by us as of the beginning of such Recognition Period, then, to the extent of the excess of (1) the fair market value of such asset as of the beginning of such
Recognition Period over (2) our adjusted basis in such asset as of the beginning of the Recognition Period (the Built-In Gain), such Built-In Gain, which may be reduced by certain net operating loss carryforwards, will be subject to tax
at the highest regular corporate rate. The Recognition Period began January 1, 1994, and will expire December 31, 2003. Further, if we acquire any asset from a C corporation in a transaction in which the basis of the asset in our hands is determined
by reference to the basis of the asset (or any other property) in the hands of the C corporation (such as our acquisition of Signature Inns by reason of our acquisition of Signature Inns, Inc. on May 7, 1999), and we recognize gain on the
disposition of such asset during the ten-year period beginning on the date on which such asset was acquired by us, then, to the extent of the Built-In Gain, such gain will



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be subject to tax at the highest regular corporate rate. The amount of our Built-In-Gain based on the
appraisals obtained in connection with our initial public offering in 1994 is approximately $5.1 million. The amount of our Built-In Gain attributable to the Signature Inns acquisition is less than $1.0 million. As a result of our disposition of
Inns during 2001 and 2002, we realized Built-In Gains of $1.5 million. These Built-In Gains and the associated federal income taxes were not recognized in 2001 or 2002, but have been deferred until we are in a net taxable income position, at which
time, the Built-In Gain will be offset by the net operating loss carry-forward of $1.2 million.



Requirements for Qualification



The Internal Revenue Code defines a REIT as a corporation, trust or association (1) which is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by
transferable shares or by transferable certificates of beneficial interest; (3) which would be taxable as a domestic corporation, but for Sections 856 through 860 of the Internal Revenue Code; (4) which is neither a financial institution nor an
insurance company subject to certain provisions of the Internal Revenue Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) at any time during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities); (7) which makes an election to be a REIT and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met in order to elect and maintain REIT status; (8) which uses a calendar year for federal income tax purposes and complies with the record keeping requirements of the Internal Revenue
Code and Treasury Regulations promulgated thereunder; and (9) which meets certain other tests, described below, regarding the nature of its income and assets. The Internal Revenue Code provides that conditions (1) to (4), inclusive, must be met
during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. We believe that we have met since we became a
publicly held company, and that we currently do meet, all of such definitional requirements.



Income Tests



In order for us to maintain our qualification as a REIT, we must satisfy two gross income tests annually.



| |  |  | First, at least 75% of our gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived
directly or indirectly from investments relating to real property or mortgages on real property (including rents from real property and, in certain circumstances, interest) or qualified temporary investment income.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Second, at least 95% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property or
temporary investments, and from dividends and other types of interest and gain from the sale or disposition of stock or securities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Rents received by us under the master leases with Kitchin Hospitality will qualify as rents from real property in satisfying
the gross income requirements for a REIT described above only if several conditions are met.



| |  |  | First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be
excluded from the term rents from real property solely by reason of being based on a fixed percentage or percentages of receipts or sales. Therefore, the percentage rent provisions of the master leases should not disqualify rental income
received from Kitchin Hospitality.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Second, the Internal Revenue Code provides that rents received from a tenant, directly or indirectly, will not qualify as rents from real property in
satisfying the gross income tests if the REIT, or a direct or indirect owner of 10% or more of the REIT, directly or constructively owns 10% or more of such tenant (a Related Party Tenant). We believe that since January 1, 1994, we have
satisfied, and we will use our best efforts to continue to satisfy this requirement. (Kitchin Hospitality is not and should not become a Related Party Tenant of Jameson by reason of our adherence to the Ownership Limit and the Related Party Limit
set forth in our Articles of Incorporation).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease,
then the portion of rent attributable to such personal property will not qualify as rents from real property. Applicable Internal Revenue Code provisions provide that with respect to each lease, rent attributable to the personal property
for the taxable year is that amount which bears the same ratio to total rent as the average of a REITs fair market value of all personal property at the beginning and at the end of each taxable year bears to the average of the REITs
aggregate fair market value of all real and personal property at the beginning and at the end of such taxable year. We have confirmed by numerical testing that the resulting rental income attributable to personal property since January 1, 1994 has
been less than 15%. We monitor these tests regularly. If we project that for any Inn for any taxable year the resulting rental income attributable to personal property may exceed 15% of all rental income, a portion of the personal property of that
Inn may be sold by us to Kitchin Hospitality, with the lease payments adjusted accordingly.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Finally, for rents received to qualify as rents from real property, the REIT generally must not operate or manage the leased property or furnish or
render services to the tenants of such property, other than through an independent contractor from whom the REIT derives no revenue; provided, however, we may directly perform certain services other than services which are considered rendered to the
occupant of the property.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have
not, do not and will not knowingly (1) charge rent for any property that is based in whole or in part on the income or profits of any person (except by reason of being based on a percentage of receipts or sales, as described above); (2) rent any
property to a Related Party Tenant; (3) lease personal property in connection with the rental of any Inn which would cause the rental income attributable to such personal property to exceed 15% of the amount of total rental income from such
property; or (iv) perform services considered to be rendered for the occupants of the Inns other than through an independent contractor.



Under the master leases, Kitchin Hospitality has leased the land, buildings, improvements, furnishings, and equipment comprising the Inns
from us. Kitchin Hospitality pays us a per room rent (Base Rent) plus additional rent based on a percentage of the gross room rental revenues (Percentage Rent, with the total of the Base Rent and Percentage Rent being called
Total Rent). In order for the Total Rent to constitute rents from real property, the leases must be respected as true leases for federal income tax purposes and not treated as service contracts, joint venture or some other
type of arrangement. The determination of whether the leases are true leases depends on an analysis of all of the surrounding facts and circumstances.



In addition, pursuant to Section 7701(e) of the Internal Revenue Code, a service contract, partnership agreement, or some other type of
arrangement may be treated instead as a lease of property if the contract, agreement or arrangement is properly treated as a lease of property, taking into account all relevant factors, including whether or not: (1) the service recipient is in
physical possession of the property, (2) the service recipient controls the property, (3) the service recipient has a significant economic or possessory interest in the property (e.g., the propertys use is likely to be dedicated to the service
recipient for a substantial portion of the useful life of the property, the service recipient shares the risk that the property will decline in value, the service recipient shares in any appreciation in the value of the property, the service
recipient shares in savings in the propertys operating costs, or the service recipient bears the risk of damage to or loss of the property), (4) the service provider does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the lease, (5) the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient and (6) the contract price does not
substantially exceed the rental value of the property for the term of the lease.



Under the master leases, (1) Kitchin Hospitality has the right to exclusive possession, use and quiet enjoyment of the Inns during the term of the master leases, (2) Kitchin Hospitality bears the cost
of, and is responsible for daily maintenance and repair of the Inns, other than the cost of maintaining underground utilities and structural elements (including the roofs) of the improvements, (3) Kitchin Hospitality dictates how the Inns are



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operated, maintained, and improved and bears all of the costs and expenses of operating the Inns
(including the cost of any inventory used in their operation) during the term of the leases (other than real and personal property taxes, casualty, liability and other types of insurance and equipment and the maintenance of structural elements,
roofs and underground utilities), (4) Kitchin Hospitality benefits from any savings in the costs of operating the Inns during the term of the leases, (5) in the event of damage or destruction to an Inn, Kitchin Hospitality is at economic risk
because it will be obligated to restore the property to its prior condition and bear all costs of such restoration in excess of any insurance proceeds (except, under certain circumstances, during the last six months of the term of the master
leases), (6) Kitchin Hospitality has indemnified us against all liabilities imposed on us during the term of the master leases by reason of injury to persons or damage to property occurring at the Inns or due to Kitchin Hospitalitys use,
management, maintenance or repair of the Inns, and (7) Kitchin Hospitality is obligated to pay substantial fixed rent for the term of the leases.



Pursuant to IRS Revenue Ruling 55-540, if one or more of the following conditions were present, the master leases would instead be
considered as conditional contracts for purchase and sale of the Inns:



| |  |  | portions of the periodic payments are made specifically applicable to an equity interest in the property to be acquired by Kitchin Hospitality,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Kitchin Hospitality will acquire title upon the payment of a stated amount of rentals under the contract which it is required to make,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the total amount which Kitchin Hospitality is required to pay for a relatively short period of use constitutes an inordinately large proportion of the total sum
required to be paid to secure the transfer of the title,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the agreed rental payments materially exceed the current fair rental value,
| | - |  | -----------------------------------------------------------------------------



| |  |  | the property may be acquired under a purchase option at a price which is nominal in relation to the value of the property at the time when the option may be
exercised, as determined at the time of entering into the original agreement, or which is a relatively small amount when compared with the total payments which are required to be made, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | some portion of the periodic payments is specifically designated as interest or is otherwise readily recognizable as the equivalent of interest.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



Under the master leases, (1) no
portion of the Total Rent has been or will be applied to any equity interest in the Inns to be acquired by Kitchin Hospitality, (2) Kitchin Hospitality has not acquired and will not be acquiring title to the Inns upon the payment of a stated amount
of either Base Rent or Percentage Rent, (3) the Total Rent does not and will not materially exceed the current fair rental value of the Inns, (4) the Inns may not be acquired by Kitchin Hospitality under a purchase option and (5) no portion of
either Base Rent or Percentage Rent has been or will be specifically designated as interest or will be recognizable as the equivalent of interest. We believe that the master leases will be treated as true leases for federal income tax purposes.
However, the IRS could challenge the tax treatment of the master leases, and, if it does, it could be successful. If the master leases are recharacterized as a service contract, partnership agreement, or some other type of arrangement rather than a
true lease, part or all of the payments that we receive from Kitchin Hospitality may not satisfy the various requirements for qualification as rents from real property. In that case, we likely would not be able to satisfy either the 75%
or 95% gross income tests and, as a result, would fail to qualify as a REIT.



Any gross income derived from a prohibited transaction is subject to a 100% tax. The term prohibited transaction generally includes a sale or other disposition of property (other than
foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business. None of our assets are or have been held for sale to customers in the ordinary course of our business and we will not sell an Inn or
associated property in the ordinary course of our business. We sold four Inns during 2002 because those Inns were under-performing. Kitchin Hospitality advised that its projections for those Inns indicated marginal results. The sale of Inns by us is
extraordinary and we do not consider the sale of those Inns as a part of our business. Whether property is held primarily for sale to customers in the ordinary course of a trade or business depends, however, on the facts and



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circumstances in effect from time to time, including those related to a particular property. Nevertheless,
we have since January 1, 1994 complied with and we will attempt to continue to comply with the terms of the safe- harbor provisions in the Internal Revenue Code prescribing when asset sales will not be characterized as prohibited transactions.
Complete assurance cannot be given, however, that we can comply with the safe-harbor provisions of the Internal Revenue Code or avoid owning property that may be characterized as property held primarily for sale to customers in the ordinary
course of a trade or business.



If we fail
to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for such year if we are entitled to relief under certain provisions of the Internal Revenue Code. These relief provisions will
generally be available if (1) our failure to meet such tests is due to reasonable cause and not due to willful neglect, (2) we attach a schedule of the sources of our gross income to our return, and (3) any incorrect information on such schedule was
not due to fraud with intent to evade tax. We cannot state, however, whether in all circumstances we would be entitled to the benefit of these relief provisions. As discussed above, even if these relief provisions apply, a 100% tax would be imposed
which would be equal to the excess of 75% or 95% of our gross income over our qualifying income in the relevant category, whichever is greater, multiplied by the ratio that REIT taxable income bears to gross income for the taxable year (with certain
adjustments).



Asset Tests



At the close of each quarter of our taxable year, we must
also satisfy three tests relating to the nature of our assets. First, at least 75% of the value of our total assets must be represented by real estate assets which means (1) real property (including interests in real property and
interests in mortgages on real property), (2) shares in other REITs, (3) stock or debt instruments held for not more than one year purchased with the proceeds of a stock offering or long-term (at least five years) debt offering of the Company,
and (4) cash, cash items (including receivables) and government securities. Second, not more than 25% of our total assets may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuers securities owned by us may not exceed 5% of the value of our total assets and we may not own more than 10% of the total voting power of the outstanding securities of any one issuer nor 10% of the total value
of the outstanding securities of any one issuer. We have satisfied these asset tests since December 31, 1993, and we will use our best efforts to continue to satisfy such tests in the future.



After meeting the assets tests at the close of any quarter, we
will not lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If the failure to satisfy the asset tests results from an acquisition of securities or other
property during a quarter, the failure can be cured by disposition of sufficient non-qualifying assets within 30 days after the close of that quarter. We maintain adequate records of the value of our assets to ensure compliance with the asset test
and we intend to take such other action within 30 days after the close of any quarter as may be required to cure any noncompliance. However, this action may not always be successful.



Annual Distribution Requirements



In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to
our shareholders in an amount at least equal to (A) the sum of (1) 90% of our REIT taxable income (computed without regard to the dividends paid deduction and any net capital gain) and (2) 90% of our net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of noncash income. In addition, if we dispose of any asset during our Recognition Period, we will be required to distribute at least 90% of the Built-In Gain (after tax), if any, recognized on
the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that we do not distribute all of our net capital gain and all of our REIT taxable income, as adjusted, we will be subject to tax thereon at regular corporate tax rates. Furthermore,
if we should fail to distribute our required distribution (described in the first sentence of this paragraph) during each calendar year, we would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed.



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Since January
1, 1994, we have made, and we hereafter will make, timely distributions sufficient to satisfy all annual distribution requirements. However, it is possible that, from time to time, we may experience timing differences between (1) the actual receipt
of income and actual payment of deductible expenses and (2) the inclusion of that income and deduction of such expenses in arriving at our REIT taxable income. Therefore, we could have less cash available for distribution than would be necessary to
meet our annual 90% distribution requirement or to avoid federal corporate income tax with respect to capital gain or the 4% nondeductible excise tax imposed on certain undistributed income. To meet the 90% distribution requirement necessary to
qualify as a REIT or to avoid federal income tax with respect to capital gain or the excise tax, it could be necessary for us to borrow funds.



Under certain circumstances, we may be able to rectify a failure to meet the distribution requirement for a year by paying dividends to
shareholders in a later year. If we declare a dividend before the date on which our tax return is due for a taxable year (including extensions) and distribute the amount of such dividend to shareholders in the 12-month period following the close of
such taxable year, such subsequent year dividend may be deductible in computing our REIT taxable income for the immediately preceding year. The distribution of such dividend must be made no later than the date of the first regular dividend payment
made after the declaration and distribution of such dividend and we must elect such treatment in our return.



Shareholders receiving subsequent year distributions are taxable on such distributions in the year of actual receipt except in the
following case. Any distributions we declare in October, November or December of any year payable to a shareholder of record on a specified date in any such month shall be treated as both paid by us and received by the shareholder on December 31,
provided that the distribution is actually paid during January of the following calendar year. However, if we actually pay the declared distributions before December 31, the distributions will be treated as both paid by us and received by the
shareholders on the actual dates paid and received, respectively.



If, as a result of an audit by the IRS, the REIT taxable income for a prior taxable year is increased, we may elect to distribute an additional deficiency dividend, as defined under Section 860 of the Internal
Revenue Code, and claim an additional deduction for dividends paid for such taxable year in order to meet the annual distribution requirement. All deficiency dividends must be distributed within 90 days after the final determination of an audit, and
the claim for such deficiency dividends must be filed within 120 days of such determination. We would also be liable for the payment of interest charges on the amount of the deficiency dividend. However, the payment of such dividends would ensure
that our qualification as a REIT would not be jeopardized due to a failure to meet our annual distribution requirement.



Failure to Qualify



If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, we will be subject to tax
(including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to shareholders in any year in which we fail to qualify will not be deductible by us nor will they be required to be made. In such
event, to the extent of current and accumulated earnings and profits, all distributions to shareholders will be taxable as ordinary income, and, subject to certain limitations of the Internal Revenue Code, corporate distributees may be eligible for
the dividends received deduction (such deduction is not available to corporate distributees so long as we qualify as a REIT). Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the
four taxable years following the year during which we ceased to qualify as a REIT.



24



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Taxation of Shareholders



Tax Consequences to Non Tax-Exempt U.S.
Shareholders. As long as we qualify as a REIT, distributions made to our taxable U.S. shareholders from current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by such U.S.
shareholders as ordinary income in the year they are received and will not be eligible for the dividends received deduction for corporations. Such distributions will be treated as portfolio income and not as income from passive activities.
Accordingly, shareholders will not be able to apply any passive losses against such income. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed our actual net capital
gain for the taxable year) without regard to the period for which a shareholder has held our stock. However, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income.



Distributions in excess of current and accumulated earnings
and profits will not be taxable to a U.S. shareholder to the extent such distributions do not exceed the adjusted basis of such U.S. shareholders shares, but rather will reduce the adjusted basis of such shares. To the extent that our
distribution exceeds our accumulated earnings and profits and the adjusted basis of a U.S. shareholders shares, such distributions will be included in income as long-term capital gain (or short-term capital gain if the shares have been held
for one year or less) assuming the shares are held as a capital asset by the U.S. shareholder. Shareholders may not include in their income tax returns any net operating losses or capital losses of the Company. Finally, in general, any loss upon a
sale or exchange of shares by a shareholder who has held such shares for more than one year (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of distributions from us required to be treated by
such shareholder as long-term capital gain.



In
determining the extent to which a distribution on the Series A Preferred Stock or Series S Preferred Stock constitutes a dividend for tax purposes, our earnings and profits will be allocated, on a pro rata basis, first to distributions with respect
to the Series A Preferred Stock and the Series S Preferred Stock, and then to the common stock.



Under the Internal Revenue Code we are permitted to make an election to treat all or a portion of our undistributed net capital gain as if it had been distributed to our shareholders. If we were to
make such an election, our shareholders would be required to include in their income as long-term capital gain their proportionate share of our undistributed net capital gain, as we designated. Each of our shareholders would be deemed to have paid
his proportionate share of our income tax with respect to such undistributed net capital gain, and this amount would be credited or refunded to the shareholder. In addition, the tax basis of the shareholders stock would be increased by his or
her proportionate share of undistributed net capital gain included in his or her income less his or her proportionate share of our income tax with respect to such gains. With respect to distributions we designate as capital gain dividends, we may
designate (subject to certain limits) whether the dividend is taxable to shareholders as a 20% rate gain distribution or as an unrecaptured depreciation distribution taxed at a 25% rate.



Information Reporting Requirements and Backup Withholding. We will report to our U.S. shareholders and
the IRS the amount of distributions paid during each calendar year and the amount of tax withheld, if any. Under the backup withholding rules, a U.S. shareholder may be subject to backup withholding at the rate of 30% with respect to distributions
paid unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding
and otherwise complies with applicable requirements of the backup withholding rules. A shareholder that does not provide us with his correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the shareholders income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status to us.
See below  Taxation of Non-U.S. Shareholders.



Taxation of Tax-Exempt Shareholders. Distributions to a U.S. shareholder that is a tax-exempt entity should not constitute unrelated business taxable income as defined in Section 512(a) of the Internal Revenue Code
(UBTI), provided that the tax-exempt entity has not financed the acquisition of our shares with acquisition indebtedness within the meaning of Section 514(c) of the Internal Revenue Code and the shares are not otherwise used
in an unrelated trade or business of the tax-exempt entity. In addition, if we are considered to be a pension-



25



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held REIT, then a portion of the dividends paid to qualified trusts (any trust defined under Section
401(a) of the Internal Revenue Code and exempt from tax under Section 501(a) of the Internal Revenue Code) that owns more than 10 percent by value in the REIT may be considered UBTI. In general, a pension-held REIT is a REIT that is held by at least
one qualified trust holding more than 25% by value of the interests in the REIT or by one or more qualified trusts (each of whom owns more than 10% by value) holding in the aggregate more than 50% by value of the interests in the REIT. We are not
currently a pension-held REIT.



Taxation of
Non-U.S. Shareholders. The rules governing United States federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign shareholders (collectively, Non-U.S. Shareholders) are
complex and we will make no attempt herein to provide more than a summary of such rules. The Treasury Department issued new final regulations relating to withholding, information reporting and backup withholding on U.S. source income paid to foreign
persons (including, for example, dividends we pay to our foreign shareholders). These regulations generally are effective with respect to payments made after December 31, 2000, subject to certain transition rules. We urge prospective investors to
consult their own tax advisors as to the effect, if any, of the final regulations on their purchase, ownership and disposition of shares of common stock.



Distributions to Non-U.S. Shareholders that are not attributable to gain from sales or exchanges by us of United States real property
interests and not designated by us as capital gains dividends will be treated as dividends of ordinary income to the extent their source is our current or accumulated earnings and profits. Such distributions will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from a Non-U.S. Shareholders investment in our stock is treated as effectively connected
with the Non-U.S. Shareholders conduct of a United States trade or business, the Non-U.S. Shareholder generally will be subject to a tax at graduated rates, in the same manner as U.S. Shareholders are taxed with respect to such distributions
(and may also be subject to the 30% branch profits tax in the case of a shareholder that is a foreign corporation). We expect to withhold United States income tax at the rate of 30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (1) a lower treaty rate applies or (2) the Non-U.S. Shareholder files an IRS Form W-8 with us claiming that the distribution is effectively connected income within the meaning of Section 871 of the Internal Revenue
Code. Distributions in excess of our current and accumulated earnings and profits will not be taxable to a Non-U.S. Shareholder to the extent that such distributions do not exceed the adjusted basis of the Non-U.S. Shareholders shares, but
rather will reduce the adjusted basis of such shares. To the extent that our distributions exceed our current and accumulated earnings and profits and the adjusted basis of a Non-U.S. Shareholders shares, such distributions will give rise to
tax liability if the Non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale or disposition of his shares in Jameson, as described below. If it cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of our current and accumulated earnings and profits, the distribution will be subject to withholding at a 30% rate. Further, we will be required to withhold 10% of any distribution in excess of our current and
accumulated earnings and profits. However, amounts withheld may be refundable if it is subsequently determined that such distribution was in excess of our current and accumulated earnings and profits and the amount withheld exceeded the Non-U.S.
Shareholders U.S. tax liability, if any.



For any year in which we qualify as a REIT, distributions that are attributable to gain from our sales or exchanges of United States real property interests will be taxed to a Non-U.S. Shareholder under the provisions of the Foreign
Investment in Real Property Tax Act of 1980 (FIRPTA). Under FIRPTA, distributions attributable to gain from sales of United States real property interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a United States business. Non-U.S. Shareholders would thus be taxed at the normal capital gain rates applicable to U.S. Shareholders (subject to any applicable alternative minimum tax). Also, distributions subject to FIRPTA may
be subject to a 30% branch profits tax in the case of a foreign corporate shareholder not entitled to treaty exemption. We are required by Treasury Regulations to withhold 35% of any distribution to a Non-U.S. Shareholder that could be designated by
us as a capital gains dividend. This amount is creditable against the Non-U.S. Shareholders FIRPTA tax liability.



Gain recognized by a Non-U.S. Shareholder upon a sale of shares generally will not be taxed under FIRPTA if we are a domestically
controlled REIT, defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the REITs stock was held directly or indirectly by foreign persons. We believe that we are a
domestically controlled REIT, and therefore the sale of our shares should not be subject to taxation under FIRPTA. We anticipate that we will continue to be a domestically controlled REIT and that



26



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sales of our shares by Non-U.S. Shareholders will not be subject to U.S. taxation unless (1) the
investment in the shares is effectively connected with the Non-U.S. Shareholders trade or business in the United States, in which case such Non-U.S. Shareholder would be taxed at the normal capital gain rates applicable to U.S.
Shareholders (subject to any applicable alternative minimum tax), or (2) in the case of a Non-U.S. Shareholder who is a nonresident alien individual, such Non-U.S. Shareholder was present in the United States for a period or periods
aggregating 183 days or more during the taxable year and certain other conditions apply, in which case such person would be subject to a 30% tax on his capital gains.



Other Tax Consequences



We and our shareholders may be subject to state or local taxation in various state or local jurisdictions, including those in which we or
they transact business or reside. The state and local tax treatment of Jameson and our shareholders may not conform to the federal income tax consequences discussed above. Consequently, you should consult your own tax advisor regarding the effect of
state and local tax laws on an investment in us.



See our Financial Statements of Jameson Inns, Inc. attached for information relating to our profits and losses and total assets.



27



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ITEM 2. PROPERTIES.



The Inns. The following tables set forth certain information about our 121 operating Inns at December 31, 2002. These Inns secure our mortgage debt in the amount of $222.8 million.



Jameson Inns



|                   |  | Year Opened/ Expanded |  | Number Of Guestrooms
|------------------ |  | --------------------- |  | --------------------
|ALABAMA:           |  |                       |  |                     
|Albertville        |  | 1994                  |  | 40                  
|Alexander City     |  | 1994/1995             |  | 60                  
|Arab               |  | 1995                  |  | 40                  
|Auburn             |  | 1997                  |  | 40                  
|Bessemer           |  | 1999/2000             |  | 60                  
|Decatur            |  | 1996/1999             |  | 58                  
|Eufaula            |  | 1996                  |  | 40                  
|Florence           |  | 1996/1996             |  | 63                  
|Greenville         |  | 1996                  |  | 40                  
|Jasper             |  | 1997/1998             |  | 58                  
|Oxford             |  | 1997/2002             |  | 60                  
|Ozark              |  | 1995                  |  | 39                  
|Prattville         |  | 1998/1999             |  | 58                  
|Scottsboro         |  | 1998/2001             |  | 60                  
|Selma              |  | 1992/1995             |  | 59                  
|Sylacauga          |  | 1997/2001             |  | 60                  
|Trussville         |  | 1998/1999             |  | 60                  
|Tuscaloosa(1)      |  | 1997/2002             |  | 60                  
|                   |  |                       |  |                     
|Subtotal (18 Inns) |  |                       |  | 955                 
|                   |  |                       |  |                     
|FLORIDA:           |  |                       |  |                     
|Crestview          |  | 2000                  |  | 55                  
|Jacksonville       |  | 2000                  |  | 79                  
|Lake City          |  | 1999                  |  | 55                  
|Lakeland           |  | 2000                  |  | 67                  
|Ormond Beach       |  | 2000                  |  | 67                  
|Palm Bay           |  | 2000                  |  | 67                  
|                   |  |                       |  |                     
|Subtotal (6 Inns)  |  |                       |  | 390                 
|                   |  |                       |  |                     
|GEORGIA:           |  |                       |  |                     
|Albany             |  | 1995/1996             |  | 62                  
|Americus           |  | 1992/1993/1994        |  | 77                  
|Bainbridge         |  | 1994/1995             |  | 59                  
|Brunswick          |  | 1995/1996             |  | 60                  
|Calhoun            |  | 1988/1994             |  | 59                  
|Carrollton         |  | 1994/1995             |  | 59                  
|Conyers            |  | 1996/1999             |  | 57                  
|Dalton             |  | 1998/1999             |  | 59                  
|Douglas            |  | 1995                  |  | 40                  
|Dublin(1)          |  | 1997                  |  | 40                  
|Eastman            |  | 1989                  |  | 41                  
|Fitzgerald         |  | 1994                  |  | 40                  
|Jesup              |  | 1990/1991             |  | 60                  
|Kingsland          |  | 1998                  |  | 40                  
|LaGrange           |  | 1996/1998             |  | 56                  
|Newnan             |  | 2000                  |  | 67                  



28



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|                   |  | Year Opened/ Expanded |  | Number Of Guestrooms
|------------------ |  | --------------------- |  | --------------------
|Perry              |  | 1998                  |  | 40                  
|Pooler             |  | 2000                  |  | 55                  
|Rome               |  | 1999                  |  | 67                  
|Thomaston          |  | 1990/1996             |  | 60                  
|Thomasville(1)     |  | 1998                  |  | 39                  
|Valdosta           |  | 1995/1995             |  | 55                  
|Warner Robins      |  | 1997                  |  | 59                  
|Waycross           |  | 1993/1996             |  | 60                  
|Waynesboro         |  | 1996                  |  | 40                  
|                   |  |                       |  |                     
|Subtotal (25 Inns) |  |                       |  | 1,351               
|                   |  |                       |  |                     
|KENTUCKY           |  |                       |  |                     
|Richmond           |  | 2001                  |  | 67                  
|                   |  |                       |  |                     
|LOUISIANA:         |  |                       |  |                     
|Lafayette          |  | 2001                  |  | 79                  
|Shreveport         |  | 2001                  |  | 67                  
|W. Monroe          |  | 2002                  |  | 67                  
|                   |  |                       |  |                     
|Subtotal (3 Inns)  |  |                       |  | 213                 
|                   |  |                       |  |                     
|MISSISSIPPI:       |  |                       |  |                     
|Grenada            |  | 1999                  |  | 39                  
|Jackson            |  | 2000                  |  | 67                  
|Meridian           |  | 1999/1999             |  | 59                  
|Pearl              |  | 2000                  |  | 67                  
|Tupelo             |  | 1998/1998             |  | 60                  
|Vicksburg          |  | 1999/1999             |  | 59                  
|                   |  |                       |  |                     
|Subtotal (6 Inns)  |  |                       |  | 351                 
|                   |  |                       |  |                     
|NORTH CAROLINA:    |  |                       |  |                     
|Dunn(1)            |  | 1998                  |  | 40                  
|Eden               |  | 1998                  |  | 39                  
|Forest City        |  | 1997/1998             |  | 59                  
|Goldsboro          |  | 2000                  |  | 67                  
|Greenville         |  | 1998                  |  | 40                  
|Henderson          |  | 2000                  |  | 67                  
|Hickory            |  | 1998/1999             |  | 59                  
|Laurinburg         |  | 1997                  |  | 40                  
|Lenoir             |  | 1998                  |  | 39                  
|Roanoke Rapids     |  | 1998                  |  | 39                  
|Sanford            |  | 1997                  |  | 40                  
|Smithfield         |  | 1998                  |  | 40                  
|Wilson             |  | 1997                  |  | 39                  
|Wilmington         |  | 2001                  |  | 67                  
|                   |  |                       |  |                     
|Subtotal (14 Inns) |  |                       |  | 675                 
|                   |  |                       |  |                     



29



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|                            |  | Year Opened/ Expanded |  | Number Of Guestrooms
|--------------------------- |  | --------------------- |  | --------------------
|SOUTH CAROLINA:             |  |                       |  |                     
|Anderson                    |  | 1993/1994             |  | 57                  
|Cheraw                      |  | 1995/1999             |  | 57                  
|Duncan                      |  | 1998                  |  | 40                  
|Easley                      |  | 1995/2002             |  | 56                  
|Gaffney                     |  | 1995/1997             |  | 58                  
|Georgetown                  |  | 1996/2002             |  | 59                  
|Greenwood                   |  | 1995/1996             |  | 64                  
|Lancaster                   |  | 1995/2001             |  | 62                  
|Orangeburg                  |  | 1995/2001             |  | 56                  
|Seneca                      |  | 1996/2001             |  | 60                  
|                            |  |                       |  |                     
|Subtotal (10 Inns)          |  |                       |  | 569                 
|                            |  |                       |  |                     
|TENNESSEE:                  |  |                       |  |                     
|Cleveland                   |  | 1998/1999             |  | 60                  
|Decherd                     |  | 1997                  |  | 40                  
|Columbia                    |  | 2000                  |  | 55                  
|Gallatin                    |  | 1999/1999             |  | 59                  
|Greenville                  |  | 2000                  |  | 55                  
|Jackson                     |  | 2000                  |  | 67                  
|Johnson City                |  | 1997                  |  | 59                  
|Kingsport                   |  | 2000                  |  | 55                  
|Oak Ridge                   |  | 1999                  |  | 79                  
|Tullahoma (4)               |  | 1997                  |  | 40                  
|Alcoa                       |  | 2001                  |  | 67                  
|                            |  |                       |  |                     
|Subtotal (11 Inns)          |  |                       |  | 636                 
|                            |  |                       |  |                     
|VIRGINIA:                   |  |                       |  |                     
|Harrisonburg                |  | 2000                  |  | 67                  
|Martinsville                |  | 2000                  |  | 55                  
|                            |  |                       |  |                     
|Subtotal (2 Inns)           |  |                       |  | 122                 
|                            |  |                       |  |                     
|JAMESON INN TOTAL (96 Inns) |  |                       |  | 5,329               
|                            |  |                       |  |                     



30



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Signature Inns



|                              |  | Year Opened |  | Number Of Guestrooms
|----------------------------- |  | ----------- |  | --------------------
|INDIANA:                      |  |             |  |                     
|Indianapolis North            |  | 1981        |  | 137                 
|Fort Wayne                    |  | 1982        |  | 102                 
|Castleton                     |  | 1983        |  | 125                 
|Lafayette                     |  | 1983        |  | 121                 
|Muncie                        |  | 1984        |  | 101                 
|Southport                     |  | 1985        |  | 101                 
|Indianapolis East             |  | 1985        |  | 101                 
|Indianapolis West             |  | 1985        |  | 101                 
|Kokomo(2)                     |  | 1986        |  | 101                 
|Evansville                    |  | 1986        |  | 125                 
|Terre Haute                   |  | 1987        |  | 150                 
|Elkhart                       |  | 1987        |  | 125                 
|South Bend                    |  | 1987        |  | 123                 
|Carmel                        |  | 1997        |  | 81                  
|                              |  |             |  |                     
|Subtotal (14 Inns)            |  |             |  | 1,594               
|                              |  |             |  |                     
|OHIO:                         |  |             |  |                     
|Cincinnati (North)            |  | 1985        |  | 130                 
|Columbus                      |  | 1986        |  | 125                 
|Dayton                        |  | 1987        |  | 125                 
|                              |  |             |  |                     
|Subtotal (3 Inns)             |  |             |  | 380                 
|                              |  |             |  |                     
|KENTUCKY:                     |  |             |  |                     
|Florence(3)                   |  | 1987        |  | 125                 
|Louisville South              |  | 1988        |  | 119                 
|Louisville East(2)            |  | 1997        |  | 119                 
|                              |  |             |  |                     
|Subtotal (3 Inns)             |  |             |  | 363                 
|                              |  |             |  |                     
|ILLINOIS:                     |  |             |  |                     
|Normal                        |  | 1988        |  | 124                 
|Peoria(2)                     |  | 1988        |  | 124                 
|Springfield(1)                |  | 1996        |  | 124                 
|                              |  |             |  |                     
|Subtotal (3 Inns)             |  |             |  | 372                 
|                              |  |             |  |                     
|IOWA:                         |  |             |  |                     
|Bettendorf                    |  | 1989        |  | 119                 
|                              |  |             |  |                     
|TENNESSEE:                    |  |             |  |                     
|Knoxville                     |  | 1989        |  | 124                 
|                              |  |             |  |                     
|SIGNATURE INN TOTAL (25 Inns) |  |             |  | 2,952               
|                              |  |             |  |                     
|COMBINED BRANDS (121 Inns)    |  |             |  | 8,281               
|                              |  |             |  |                     



|(1) |  | Land is subject to a ground lease.
|--- |  | ----------------------------------

|(2) |  | Inn co-branded as a Best Western/Signature Inn.
|--- |  | -----------------------------------------------

|(3) |  | Property is held for sale at December 31, 2002.
|--- |  | -----------------------------------------------

|(4) |  | Property expansion is under construction at December 31, 2002.
|--- |  | --------------------------------------------------------------



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ITEM 3. LEGAL PROCEEDINGS.



We are not a party to any litigation which, in our judgment, would have a material adverse effect on our operations or financial condition if adversely determined. However, due to the nature of our business, we are, from time to
time, a party to certain legal proceedings arising in the ordinary course of our business.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.



No matters were submitted to security holders for a vote during the fourth quarter of fiscal year 2002 through the solicitation of proxies or otherwise.



PART II



ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Our common stock trades on The Nasdaq National Market under the symbol JAMS. As of March 4, 2003, there were approximately
3,300 holders of record of our common stock and, we estimate, approximately 9,500 beneficial holders of our common stock.



Comparative Per Share Market Price and Dividend Information



The following table sets forth the high and low sale prices for our common stock for the periods indicated.
The prices are as reported on The Nasdaq National Market based on published financial sources. The table also sets forth the cash dividends paid per common share for the periods indicated below:



|               |  | Jameson Common Stock (JAMS)
|-------------- |  | ---------------------------
|               |  | High                       
|2002           |  |                            
|First Quarter  |  | $                          
|Second Quarter |  |                            
|Third Quarter  |  |                            
|Fourth Quarter |  |                            
|2001           |  |                            
|First Quarter  |  | $                          
|Second Quarter |  |                            
|Third Quarter  |  |                            
|Fourth Quarter |  |                            



We
intend to continue making regular quarterly distributions to our stockholders and it is possible that if the results of operations declines, the amount of the dividends declared and paid on our common stock may be further reduced or even eliminated.
Our cash available for distribution or Adjusted FFO is generally an amount equal to our net income from operations plus the amount of non-cash expenses we record, such as amortization, depreciation and stock compensation expenses, less
amounts for debt service and anticipated capital expenditures. In recent years, our dividend distributions have exceeded our Adjusted FFO.



32



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ITEM 6. SELECTED FINANCIAL DATA



The following table sets forth our selected financial and operating information on a pro forma and historical basis. The following information should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this report. The consolidated historical financial data has been derived from our audited historical consolidated financial statements.



Historical financial and operating information includes all Inns owned by us, including both those under
development as well as operating Inns; however, due to our development of new Jameson Inns, expansion of existing Jameson Inns, and sale of certain Jameson Inns, certain information may not be comparable between periods. Historical financial and
operating information includes all Signature Inns owned by us. See Item 2. Properties. The historical financial data for Signature Inns was prepared from the audited financial statements and filings of Signature for 1998. The information for the
year ended December 31, 1999 assumes the Signature Inns were operated by Kitchin Hospitality for the entire year. Historical operating results, including net income, may not be comparable to future operating results.



JAMESON INNS, INC.

SELECTED FINANCIAL INFORMATION

(dollars in thousands, except per share data, ADR and REVPAR)



|                              |  | December 31,
|----------------------------- |  | ------------
|                              |  | 2002        
|Balance Sheet Data:           |  |             
|Investment in real estate     |  | $           
|Net investment in real estate |  |             
|Total assets                  |  |             
|Total mortgage debt           |  |             
|Stockholders equity          |  |             



33



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|                                                                               |  | Year Ended December 31, |        
|------------------------------------------------------------------------------ |  | ----------------------- | -------
|                                                                               |  | 2002                    |        
|Financial Data:                                                                |  |                         |        
|Lease revenues                                                                 |  | $                       | 42,032 
|Expenses:                                                                      |  |                         |        
|Depreciation                                                                   |  |                         | 19,565 
|Property and other taxes and insurance expense                                 |  |                         | 5,418  
|General and administrative expenses                                            |  |                         | 2,366  
|Loss on disposal of furniture and equipment                                    |  |                         |       
|Write-off and amortization of offering costs                                   |  |                         |       
|Early Extinguishment of debt                                                   |  |                         | 62     
|Loss on impairment of real estate                                              |  |                         |       
|                                                                               |  |                         |        
|Income from operations                                                         |  |                         | 14,621 
|Interest expense, net of amounts capitalized                                   |  |                         | 14,794 
|Other income                                                                   |  |                         | 33     
|                                                                               |  |                         |        
|Income (loss) before discontinued operations and gain (loss) on sale of
assets |  |                         | (139   
|Gain (loss) on sale of Real Estate                                             |  |                         | 435    
|                                                                               |  |                         |        
|Income from continuing operations                                              |  |                         | 295    
|Discontinued operations including gain on sale                                 |  |                         | 441    
|                                                                               |  |                         |        
|Net income (loss)                                                              |  |                         | 736    
|Preferred stock dividends                                                      |  |                         | 6,668  
|                                                                               |  |                         |        
|Net (loss) income attributable to common stockholders                          |  |                         | (5,932 
|Basic (loss) income before discontinued operations                             |  |                         | (0.58  
|Diluted (loss) income before discontinued operations                           |  |                         | (0.58  
|Loss (income) per Common sharebasic                                           |  |                         | (0.53  
|Loss (income) per Common sharediluted                                         |  |                         | (0.53  
|Dividends paid per Common share                                                |  |                         | 0.20   
|Cash flow provided by operating activities                                     |  |                         | 18,947 
|Cash flow used in investing activities                                         |  |                         | (5,265 
|Cash flow (used in) provided by financing activities                           |  |                         | (13,338



34



---

|                                                                    |  | Year Ended December 31,
|------------------------------------------------------------------- |  | -----------------------
|                                                                    |  | 2002                   
|Other Data:                                                         |  |                        
|Funds from operations(1)                                            |  | $                      
|Ratio of earnings to fixed charges and preferred stock dividends(2) |  |                        



|Jameson Inns:                   |  | 2002 |           |   | 2001 |   |           | 2000 |  |   | 1999      |   |  | 1998 |          
|------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | ---------
|Occupancy rate                  |  |      | 53.7      | % |      |   | 54.8      | %    |  |   | 57.1      | % |  |      | 60.0     
|ADR                             |  | $    | 58.09     |   |      | $ | 56.52     |      |  | $ | 54.92     |   |  | $    | 53.05    
|REVPAR                          |  | $    | 31.18     |   |      | $ | 30.99     |      |  | $ | 31.34     |   |  | $    | 31.84    
|Room nights available           |  |      | 1,949,961 |   |      |   | 1,939,578 |      |  |   | 1,688,485 |   |  |      | 1,485,849
|Operating Inns (at period end)  |  |      | 96        |   |      |   | 98        |      |  |   | 104       |   |  |      | 88       
|Rooms available (at period end) |  |      | 5,329     |   |      |   | 5,304     |      |  |   | 5,300     |   |  |      | 4,241    



|Signature Inns:                |  | 2002 |           |   | 2001 |   |           | 2000 |  |   | 1999(3)   |   |  | 1998(3) |          
|------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ------- | ---------
|Occupancy rate                 |  |      | 41.9      | % |      |   | 48.2      | %    |  |   | 55.9      | % |  |         | 57.9     
|ADR                            |  | $    | 63.78     |   |      | $ | 62.89     |      |  | $ | 64.81     |   |  | $       | 63.41    
|REVPAR                         |  | $    | 26.72     |   |      | $ | 30.30     |      |  | $ | 36.21     |   |  | $       | 36.73    
|Room nights available          |  |      | 1,082,331 |   |      |   | 1,113,615 |      |  |   | 1,116,674 |   |  |         | 1,116,555
|Operating Inns (at period end) |  |      | 25        |   |      |   | 26        |      |  |   | 26        |   |  |         | 26       

---

|(1) |  | We believe this supplemental non-GAAP measure of operating performance is meaningful but should not be considered an alternative to generally accepted
accounting principles. We calculate FFO for all periods consistent with the National Association of Real Estate Investment Trusts, Inc. definition from their White Paper issued in April 2002. FFO has been calculated as net income attributable to
common stockholders before depreciation expense, gains or losses on disposal of depreciable real estate assets, impairment losses of real estate assets and extraordinary items. However, this information may not be comparable to similarly titled
measures presented by other companies.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



---

|(2) |  | For purposes of computing these ratios, earnings have been calculated by adding fixed charges (excluding capitalized interest and preferred stock dividends) to
income before extraordinary item. Fixed charges consist of interest costs whether expensed or capitalized, amortization of debt discounts and issue costs whether expensed or capitalized, and preferred stock dividends. There were deficiencies in the
amounts of earnings available to cover fixed charges, as defined, in the approximate amounts of $6.0 million in 2002, $10.3 million in 2001 and $500,000 in 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Assumes that the Signature Inns were owned as of January 1 of 1999 and 1998. The Signature acquisition occurred on May 7, 1999.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------



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



You should read the following discussion in conjunction with
our historical consolidated financial statements and those of Kitchin Hospitality and the accompanying notes which are included in this report.



General



The following table shows certain historical financial and other information for the years indicated.



Combined Jameson and Signature Brands



|                                |  | Year Ended December 31, |          
|------------------------------- |  | ----------------------- | ---------
|                                |  | 2002                    |          
|Occupancy rate                  |  |                         | 49.5     
|ADR                             |  | $                       | 59.81    
|REVPAR                          |  | $                       | 29.59    
|Room rentals (000s)             |  | $                       | 88,481   
|Other Inn revenues (000s)       |  | $                       | 4,660    
|Room nights available           |  |                         | 3,032,292
|Operating Inns (at period end)  |  |                         | 121      
|Rooms available (at period end) |  |                         | 8,281    



We have
grown from a hotel chain with four Jameson Inns at January 1, 1990, to 96 Jameson Inns and 25 Signature Inns in operation at December 31, 2002. In addition, we completed existing Jameson Inn expansion in January 2003. From our inception in 1988
until December 31, 1993, we were engaged in the business of developing, owning and managing Jameson Inns. As part of our development activities, we engaged in development and construction of new Jameson Inns. On December 31, 1993, we reorganized by
divesting ourselves of the subsidiary corporations through which we conducted our construction activities, securities brokerage activities and aviation operations. In addition, we transferred our outdoor advertising business to Kitchin
Hospitalitys predecessor. We no longer manage or operate our Inns upon their completion, but limit our primary activities to developing and owning the properties. Effective January 1, 1994, our primary source of revenue became lease payments
by Kitchin Hospitality which leases and operates our Jameson Inns under the master leases.



All of the Signature Inns are also leased to Kitchin Hospitality. On May 7, 1999, we merged with Signature Inns, Inc. which owned and operated a chain of limited service hotels in the Midwest. In this
merger, we acquired 25 Signature Inns and an interest in a limited partnership which owned an additional Signature Inn. In December 1999, we acquired the outstanding limited partnership interest in that partnership and took direct ownership of the
hotel property.



36



---

Effective April 2, 1999, we acquired certain assets of Kitchin Hospitality consisting of
billboards, ground leases for the sites on which the billboards are erected and other related assets. As consideration for these assets we issued 72,727 shares of our Series A preferred stock, paid cash in the amount of $400,000 and assumed
liabilities in the amount of approximately $700,000. We obtained an opinion from Interstate/Johnson Lane Corporation that the terms of the transaction were fair from a financial standpoint to us and to our shareholders. These assets are leased to
and operated by Kitchin Hospitality which pays us annual rentals on each of the billboards. Rental payments from these assets totaled approximately $623,000 in 2002, $734,000 in 2001 and $680,000 in 2000. In addition to the billboards leased to
Kitchin Hospitality, we collect rental payment on other billboards owned by us and leased to parties other than Kitchin Hospitality.



Although room revenues are earned by our lessee, Kitchin Hospitality, not by us, they are the basis upon which the percentage rent earned
by us (under the master leases) is determined and, accordingly, we discuss those revenues below. The term Same Inn Room Revenues refers to revenues earned with respect to our Inns which were operating during all of both comparison
periods and includes revenues attributable to rooms added to our existing Inns by virtue of expansion of such Inns.



The master leases provide for the payment of base rent and percentage rent. For the year ended December 31, 2002, we earned a combined
base rent and percentage rent in the aggregate amount of $28.0 million from the rental of Jameson Inns and $14.0 million from the rental of Signature Inns. The principal determinant of percentage rent under the master leases is room revenues of our
Inns. Therefore, we believe that a review of the historical performance of the operations of our operating Inns occupancy, ADR and REVPAR is appropriate for understanding our lease revenue (seeFunds from Operations, below, for the
calculation of FFO, ADR and REVPAR).



We also
continue to consider other strategic alternatives as a possible means of growth and increasing shareholder value. These include acquisitions of other properties, business combinations, corporate restructuring, terminating our status as a real estate
investment trust and other alternatives. We have made no decisions or commitments at this time, but we intend to continue to consider any such alternatives.



37



---



Results of Operations



Comparison of the Year Ended December 31, 2002 to
the Year Ended December 31, 2001



For fiscal
2002, we earned base rent and percentage rent in the aggregate amount of $42.0 million. Our lease revenue for 2002 decreased $763,000 as compared to 2001 due to the following factors:



| |  |  | Lease revenues earned from the Signature Inns decreased $751,000 in 2002 versus 2001 due to a decline in occupancy rate, as well as a slight decrease of room nights
available in 2002 as a result of the sale of one Signature Inn during 2002. In 2002, all that was earned from the Signature Inns was base rent. During 2001, approximately $386,000 of percentage rent was earned by the Signature brand above the base
rent. Lease revenues earned from the Jameson Inns increased $20,000 due to a slight increase in the average daily rate compared to 2001, offset somewhat by a decline in the occupancy rate. One new Jameson Inn was opened in 2002, and five new Jameson
Inns were opened during 2001. The increase in the number of rooms due to the opening of new Inns was offset partially by the sale of three Jameson Inns during 2002. Additionally, lease revenue earned from billboards decreased $32,000 in 2002 due to
the sale of certain billboards in connection with Inn sales during 2001 and 2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A soft U.S. economy during 2002 along with the continuing effect of the September 11, 2001 terrorist attacks negatively impacted travel and demand for hotel rooms
generally.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our property and other
taxes expenses totaled $3.9 million in 2002, compared with $4.3 million for 2001. The decrease of $342,000 is attributable primarily to a decrease in franchise taxes due in 2002 to changes in the franchise tax laws in certain of the states in which
our Inns are located, as property taxes were relatively flat compared to 2001.



Our insurance expenses totaled $1.5 million in 2002, compared with $960,000 for 2001. The $540,000 increase is attributable to increased costs associated with the year end 2001 renewal of our property
and liability insurance which was adversely affected by the impact to the insurance markets of the September 11, 2001 terrorist attacks.



Our depreciation expense remained relatively constant at $19.6 million compared to $19.3 million in 2001. Our net operating Inns decreased
by three but this was offset by the depreciation of several Inn expansions and capital expenditures on the Inns.



Our general and administrative expense includes an allocation of salary, office overhead and other general and administrative costs of the
corporate office. We share employees and office space with Kitchin Hospitality. Our general and administrative expenses for 2002 increased to $2.4 million as compared to $1.7 million in 2001 due to additional time spent by shared employees in our
business matters as compared to Kitchin Hospitalitys, and an increase in professional fees.



During 2002 we experienced a positive net impact on our earnings of approximately $567,000 with respect to properties sold. This was
comprised of a net gain of $558,000 upon the sale of four Inns, and a net gain of $9,000 in connection with the sale of a tract of land during 2002. During 2001 we experienced a negative net impact on our earnings of approximately $1,011,000 with
respect to properties sold or held for sale. This consisted of a $2,110,000 impairment loss related to seven Inns, a net gain of $903,000 upon the sale of five other Inns, and a net gain of $197,000 in connection with the sale of a tract of land
during 2001.



Our interest expense decreased from
$18.6 million in 2001 period to $14.8 million in 2002. This was the result of the weighted average interest rate on our debt of 6.1% during 2002 compared to 8.3% during 2001. Our principal balance of our outstanding debt was reduced $4.2 million
during 2002.



38



---



Our income
from discontinued operations increased slightly to $308,000 in 2002 compared to $262,000 in 2001. We now report as discontinued operations assets held for sale and assets sold in the current period.



Comparison of the Year Ended December 31, 2001 to the Year Ended December
31, 2000



For fiscal 2001, we earned base
rent and percentage rent in the aggregate amount of $42.8 million. Our lease revenue for 2001 increased $532,000 as compared to fiscal 2000. This was due to the following factors:



| |  |  | Lease revenues earned from the Jameson Inns increased $2,729,000 due primarily to an increase in available rooms during 2001. Five new Jameson Inns opened in 2001,
and seventeen new Jameson Inns were opened during 2000. This increase in the number of rooms was offset partially by the sale of eleven Jameson Inns during 2001. Lease revenues earned from the Signature Inns decreased $2,180,000 in 2001 versus 2000
due to a decline in REVPAR. In 2001, approximately $386,000 of percentage rent was earned by the Signature Inns above the base rent. During 2000, approximately $2,695,000 of percentage rent was earned by the Signature Inns above the base rent.
Additionally, lease revenue earned from billboards increased $54,000 in 2001 due to the additions of new billboards.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our property and other taxes expenses totaled $4.3 million in 2001, compared with $3.6 million for 2000. The increase of $699,000 is
attributable primarily to the increase in the number of operating Jameson Inns subsequent to December 31, 2000 and an increase in franchise taxes in 2001 due to changes in the franchise tax laws in certain of the states in which our Inns are
located.



Our insurance expenses totaled $960,000
in 2001, compared with $850,000 for 2000. The $110,000 increase is attributable primarily to the increase in the number of operating Jameson Inns subsequent to December 31, 2000.



Our depreciation expense increased from $14.3 million in 2000 to $19.3 million in 2001, due primarily to an
increase in the number of operating Jameson Inns subsequent to December 31, 2000 and the depreciation of capital expenditures on the Inns.



Our general and administrative expense includes an allocation of salary, office overhead and other general and administrative costs of the
corporate office. We share employees and office space with Kitchin Hospitality. Our general and administrative expenses for 2001 increased to $1.7 million as compared to $1.4 million in 2000 due to additional time spent by shared employees in our
business matters as compared to Kitchin Hospitalitys.



During 2001 we experienced a negative net impact on our earnings of approximately $1,011,000 with respect to Inns sold or held for sale. This was comprised of a $2,110,000 loss on impairment of real estate related to seven of our
Inns, a net gain of $903,000 upon the sale of five other Inns, and a net gain of $197,000 in connection with the sale of a tract of land during 2001. In 2000, we sold a Jameson Inn and recorded a loss of $37,000, and a gain of $321,000 in connection
with the sale of a tract of land.



Our interest
expense increased from $14.9 million in 2000 to $18.9 million in 2001. This was the result of higher average principal indebtedness outstanding related primarily to the opening of new Jameson Inns subsequent to December 31, 2000, and a slightly
higher average effective interest rate for 2001 as compared to 2000. Our principal balance of our outstanding debt increased $19.9 million during 2001. The weighted average interest rate on our debt was 8.3% during 2001 compared to 8.2% during 2000.



39



---



Funds
from Operations (FFO)Supplemental Non-GAAP Information



We believe FFO to be a meaningful measure of operating performance but it should not be considered an alternative to generally accepted accounting principles. We calculate FFO for all periods consistent with the National
Association of Real Estate Investment Trusts, Inc. definition from their White Paper issued in April 2002. FFO has been calculated as net income attributable to common stockholders before depreciation expense, gains or losses on disposal of
depreciable real estate assets, impairment losses of real estate assets and extraordinary items. However, FFO as presented in this table may not be comparable to similarly titled measures presented by other companies. The following table illustrates
our calculation of funds from operations and adjusted FFO for the years ended December 31, 2002, 2001 and 2000.



|
|

|                                                              |  | Year Ended December 31, |       
|------------------------------------------------------------- |  | ----------------------- | ------
|                                                              |  | 2002                    |       
|                                                              |  | (dollars in thousands)  |       
|Net income (loss) available to common stockholders            |  | $                       | (5,932
|Depreciation expense(1)                                       |  |                         | 19,757
|(Gain) loss on disposal of real estate                        |  |                         | (558  
|Loss on impairment of real estate                             |  |                         |      
|                                                              |  |                         |       
|Funds from operations (FFO)                                   |  |                         | 13,267
|Loan fee amortization expense                                 |  |                         | 853   
|Additions to reserve for furniture, fixtures and equipment(2) |  |                         | (3,666
|Required loan principal repayments(3)                         |  |                         | (8,813
|                                                              |  |                         |       
|Adjusted FFO                                                  |  | $                       | 1,641 
|                                                              |  |                         |       

---

|(1) |  | Including amounts of depreciation expense related to discontinued operations.
|--- |  | -----------------------------------------------------------------------------



|(2) |  | This amount equals 4% of the Room Revenues of our Inns for the respective period. We believe this 4% conforms to hotel industry standards as an amount necessary for
ongoing renovation and refurbishment. Our actual expenditures for these purposes have exceeded these amounts due to product and room upgrades.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Our net cash used in financing activities during 2002 included proceeds from mortgage notes net of repayments and related deferred finance costs of $4.4 million, in
addition to these scheduled principal debt payments of $8.8 million.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|
|



40



---



Liquidity and Capital
Resources



Our net cash provided by
operations was $18.9 million in 2002. Our principal sources of liquidity are:



| |  |  | existing cash on hand of $3.8 million at December 31, 2002,
| | - |  | -----------------------------------------------------------

| |  |  | the remaining availability under the line of credit and expansion construction loan, ($2.2 million at December 31, 2002),
| | - |  | -------------------------------------------------------------------------------------------------------------------------

| |  |  | proceeds from the refinancing of Inns with increased borrowing capacity, and
| | - |  | ----------------------------------------------------------------------------

| |  |  | net proceeds from the sale of Inns and land held for sale.
| | - |  | ----------------------------------------------------------



These funds are used to meet the principal repayments of our amortizing debt, the refurbishing costs and
capital maintenance of our existing Inns, and certain other cash requirements including the payment of preferred and common dividends and other operating expenses. As a REIT, we must distribute to stockholders at least 90% of our taxable income,
excluding net capital gains, to preserve the favorable tax treatment accorded to a REIT under the Internal Revenue Code. We expect to fund any required distributions through cash generated from operations, existing cash on hand and external
borrowings as necessary. However, we do not anticipate having net taxable income in 2003.



Our net cash used in investing activities for 2002 totaled $5.3 million. We received net cash proceeds totaling $6.5 million from the sale of four Inns and two parcels of land. Proceeds from these
asset sales were primarily used to retire debt. We had an agreement to sell a Signature Inn hotel at December 31, 2002 that we sold during the first quarter of 2003, and we may sell additional Inns in the future. Additions to property and equipment
totaled $12.5 million for 2002 as compared to $30.5 million in 2001. Included in additions to property and equipment are capital expenditures for refurbishing and renovating existing Inns of approximately $6.9 million for 2002 compared to $8.6
million for 2001. We plan to spend $4.4 million during 2003 on refurbishment and renovation projects of existing Inns, including the planned conversion of a Signature Inn to a Jameson Inn. These expenditures exceed our minimum policy of 4% of Inn
room revenues, which we commit to spend for capital improvements and the refurbishment and replacement of furniture, fixtures and equipment at our Inns. These capital expenditures are funded from operating cash flow, from net proceeds from the
disposition of under-performing hotels and possibly from additional borrowings. We anticipate this trend to continue during 2003 as we refurbish our existing Inns to ensure their competitiveness in the market and begin to convert a Signature Inn to
a Jameson Inn in the first quarter of 2003. These capital expenditures are in addition to amounts spent on normal repairs and maintenance, which are paid for by lessee Kitchin Hospitality. The remaining $5.6 million in additions to property and
equipment in 2002 is due primarily to the opening of one new Inn and expansions of four Inns during the year.



Our net cash used in financing activities during 2002 totaled $13.3 million. This amount included the payment of dividends to common and
preferred shareholders of $9.0 million, net proceeds from our Dividend Reinvestment Plan of $112,000, proceeds from mortgage notes net of repayments and related deferred finance costs of $4.4 million, and scheduled long-term debt payments of $8.8
million.



Our long-range plan is to
selectively develop new Jameson Inns and to expand existing Jameson Inns as suitable opportunities arise and when adequate sources of financing are available, but we currently have no new development plans scheduled for 2003. Since our election to
be taxed as a REIT, we have financed construction of new Jameson Inns and currently intend to continue financing the construction of any new Inns entirely with bank borrowings. We continue to consider possible additional long-term debt or equity
financing that would be available to fund any future development activities.



41



---



At December
31, 2002 the Company had total indebtedness of $222.8 million compared to $227.0 million at December 31, 2001. Of that, approximately $189.0 million is variable rate debt adjustable during 2003 as follows:



|Adjustment Date |  | Amount (in millions) |       | Weighted Average Interest Rate |    
|--------------- |  | -------------------- | ----- | ------------------------------ | ---
|January 2003    |  | $                    | 28.9  |                                | 5.2
|February 2003   |  |                      | 17.8  |                                | 5.2
|March 2003      |  |                      | 4.9   |                                | 4.5
|April 2003      |  |                      | 38.2  |                                | 4.6
|May 2003        |  |                      | 3.4   |                                | 4.2
|July 2003       |  |                      | 48.2  |                                | 5.6
|September 2003  |  |                      | 4.4   |                                | 7.5
|October 2003    |  |                      | 17.5  |                                | 5.4
|Adjusts Daily   |  |                      | 25.7  |                                | 2.8
|                |  |                      |       |                                |    
|Total           |  | $                    | 189.0 |                                |    
|                |  |                      |       |                                |    



During
2002 the weighted average interest rate on our debt was 6.1% compared to 8.3% during 2001. We anticipate full year 2003 required principal repayments of approximately $10.1 million.



We have $23.9 million of scheduled principal payments and maturing loans for 2003 including letters of credit
aggregating $11.1 million that expire on December 31, 2003. These letters of credit are secured by four of our Signature Inns at December 31, 2002, including the Inn sold in January 2003 which resulted in the retirement of $2.3 million of associated
indebtedness. There are three other mortgage loans, along with our line of credit, which mature during 2003. Based on our preliminary discussions with these lenders we believe we will be successful in obtaining replacement financing at renewal terms
satisfactory to us.



We have four stock incentive
plans in place. As of December 31, 2002, 2,036,298 shares of our common stock were authorized for issuance, including 686,094 available for future option grants and restricted stock grants under the 1993 and 1996 plans. As of December 31, 2002,
options to purchase 219,100 shares of our common stock were outstanding (including 63,260 which were exercisable). In 2002, we made a tender offer for outstanding options to purchase shares of common stock issued under the 1993 stock incentive plan
at a nominal price of $.01 per option share. As a result of this tender offer, options to purchase 604,833 shares of common stock were tendered and cancelled during 2002. In addition, 590,920 shares of our common stock issued to certain employees of
Jameson and Kitchin Hospitality are restricted as to sale until vested in 2003 through 2010.



On February 20, 2001, we registered with the Securities and Exchange Commission the issuance of 200,000 shares of our common stock under our Dividend Reinvestment and Stock Purchase Plan that was
approved by our board of directors on February 9, 2001. Our Dividend Reinvestment and Stock Purchase Plan provides holders of our common and preferred stock with a convenient method of investing cash dividends and voluntary cash payments in
additional shares of our common stock. We use the net proceeds received by us from the sale of the shares of common stock under the plan for working capital and other corporate purposes.



Inflation



Operators of hotels in general possess the ability to adjust room rates quickly. Nevertheless, competitive pressures have limited, and may
in the future limit, Kitchin Hospitalitys ability to raise rates in the face of inflation.



42



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Critical Accounting
Policies



The consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the U.S., which require us to make estimates and assumptions. We believe that of our significant accounting policies, the following may involve a higher degree of
judgment and complexity.



Impairment of Real Estate Assets



We review long-lived assets for indicators
of impairment at least quarterly or whenever events or changes in circumstances indicate that the carrying values of our property may be impaired. If indicators are present, we project the expected future results of operations of the asset based on
our estimates on future budgeted earnings before interest expense, income taxes, depreciation and amortization, and use growth assumptions to project these amounts over the expected life of the underlying asset. Our growth assumptions are based on
assumed future changes in the economy and changes in demand for lodging in our markets; if actual conditions differ from those in our assumptions, the actual results of each assets actual future operations could be significantly different from
the estimated results we used in our analysis. If the analysis indicates that the carrying value is not recoverable from expected future results estimated to be generated by those assets, we write down the asset to its estimated fair value and
recognize an impairment loss. Impairment losses are based on the difference between the book value of each individual property and the related estimated fair value of each property. We did not recognize any impairment losses during 2002 or 2000. In
2001, we recognized $2.1 million of impairment losses.



Overhead Allocation from Kitchin Hospitality



Kitchin Hospitality operates all of our Inns and pays all of our salaries and administrative overhead expenses pursuant to the Cost Reimbursement Agreement. The overhead allocation pursuant to the Cost Reimbursement
Agreement involves a substantial number of estimates pertaining to the allocation between entities of employees time and various other costs. Kitchin Hospitality charged the Company $1,574,000, $875,000, and $962,000 in 2002, 2001 and 2000,
respectively of allocated salaries, office overhead and other general and administrative costs pursuant to the Cost Reimbursement Agreement. We expensed approximately $1,398,000, $806,000 and $564,000 of the allocated costs in 2002, 2001 and 2000,
respectively. The remainder represented capitalizable property and equipment costs. Historically, a significant portion of the overhead expense was charged to Kitchin Hospitality for the development of new Inns.



ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



A significant portion of our existing indebtedness is subject to adjustable interest rates primarily with twelve month interest rate readjustment dates, and is secured by our Inns and billboards.
Because of the current cost and relative unavailability of fixed interest rate long-term financing, we anticipate that the majority of our future borrowings will continue to be at interest rates which adjust with certain indices. Therefore, our
costs of financing our floating rate debt may increase subject to events beyond our direct control. Our variable rate debt consists primarily of individual property mortgages that adjust one time per year at varying dates for a twelve month period
following the interest rate adjustment date. A hypothetical 100 basis point change on January 1, 2002 in the indices underlying our floating rate debt would have changed our annual interest expense by approximately $1.9 million based on the weighted
average borrowings subject to variable rates during 2002. However, the actual annual impact to interest expense would have been less than $1.9 million due to the various annual interest rate readjustment dates of our variable rate debt. We expect to
continue to selectively obtain financial instruments, including interest rate cap agreements, to limit our exposure to increases in short term interest rates.



Additional information regarding this, to the extent that it is relevant to our business, is included in Item 1 of this report under the
caption Risk FactorsInterest Rate Increases Could Increase Our Cost of Current and Future Debt and in Item 7 under the caption Liquidity and Capital Resources.



43



---



ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



The financial statements and supplementary data are indexed in Item 15 of this report.



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



None.



PART III



ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.



Directors.



The Directors
of the Company are:



Thomas W. Kitchin, 61, is
our Chief Executive Officer, a director and Chairman of the Board of Directors. He has been an officer and director of the Company since its incorporation in 1988. He served from 1977 until December 1986 as the President and Chairman of the Board of
a public oil and gas company. Prior thereto, Mr. Kitchin was involved in the banking business for 16 years. Mr. Kitchin serves as a director of the Atlanta Symphony Orchestra and a member of the board of trustees of a private school.Mr.
Kitchin is the father of Craig R. Kitchin, our President and Chief Financial Officer.



Michael E. Lawrence, 58, became a director in April 1994. Since March 1994,he has been Chief Executive Officer and a director of Sea Pines Associates, Inc., a publicly held corporation with
approximately $50 million in annual revenues which owns and operates real estate and recreational properties on Hilton Head Island, South Carolina. Mr. Lawrence is president of Sea Pines Company, Inc. and Sea Pines Real Estate Company, Inc., both
companies being subsidiaries of Sea Pines Associates, Inc. Prior to joining Sea Pines Associates, Inc., Mr. Lawrence was a management consultant with Ernst & Young from 1969 through 1989 and was a partner in that firm from 1982 through 1989. Mr.
Lawrence is a licensed real estate broker and a certified public accountant with a B.S. degree from Washington & Lee University and an M.B.A. degree from Emory University.



Robert D. Hisrich, Ph. D., 58, became a director in October 1993. Dr. Hisrich has held the A. Malachi Mixon
III Chair in Entrepreneurial Studies and has been a professor at the Weatherford School of Management, Case Western Reserve University, Cleveland, Ohio, since September 1993. From 1985 until his appointment at Case Western Reserve University, Dr.
Hisrich held the Bovaird Chair of Entrepreneurial Studies and Private Enterprise and was a Professor of Marketing and a Director of the Enterprise Development Center at The University of Tulsa, Tulsa, Oklahoma. Dr. Hisrich was a visiting professor
at the Technical University of Vienna in Austria in 2001 and at the University of Ljubljana in Slovenia in 2000. In the spring of 1992, Dr. Hisrich was a Visiting Professor of Entrepreneurship Studies at the University of Limerick, Limerick,
Ireland, and from 1990 through 1991, he was a Fulbright Professor and holder of the Alexander Hamilton Chair in Entrepreneurship at the Foundation for Small Enterprise Economic Development, Budapest, Hungary. In the spring of 1989, Dr. Hisrich was a
Fulbright Professor at the International Management Center, Budapest, Hungary. In addition, since 1974 Dr. Hisrich has been director of H & B Associates, a marketing and management consulting firm and is a director of Xeta Corporation,
Noteworthy Corporation and NeoMed. He has also held a number of other academic positions and is widely published in the areas of marketing, management and entrepreneurship. Dr. Hisrich has a B.A. degree in English and science from DePauw
University, an M.B.A. degree in marketing from the University of Cincinnati and a Ph.D. degree in business administration from the University of Cincinnati.



Thomas J. OHaren, 69, became a director in June 1997. Mr. OHaren was employed for 30 years in sales and marketing for Cigna
Financial Advisors, Inc., a company engaged in the insurance business. From May 1992 through September 1998, Mr. OHaren served that company both as a regional vice president and as a consultant. Since October 1998, Mr. OHaren has been a
management consultant to the financial services industry. He is active



44



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in the insurance industry, including serving as an adjunct professor of leadership at The American
College, the degree-granting college of the insurance industry, as a member of The American College Leadership Institute and as chairman of the board of trustees of the GAMA Foundation, a research foundation for the insurance industry. Mr.
OHaren has a B.S. degree in finance from Pennsylvania State University, received his Chartered Life Underwriter designation in 1966 and his designation as a Chartered Financial Consultant in 1983.



Executive Officers.



The executive officers of the Company are:



|Name              |  |  |  | Position                                                             
|----------------- |  |  |  | ---------------------------------------------------------------------
|                 
|Thomas W. Kitchin |  |  |  | Chief Executive Officer, Director, Chairman of the Board of Directors
|                 
|Craig R. Kitchin  |  |  |  | President, Chief Financial Officer                                   
|                 
|Steven A. Curlee  |  |  |  | Vice PresidentLegal, General Counsel, Secretary                     
|                 
|William D. Walker |  |  |  | Vice Presidentdevelopment                                           
|                 
|Martin D. Brew    |  |  |  | Treasurer, Chief Accounting Officer                                  



Set
forth below is certain information concerning our executive officers except for Mr. Thomas W. Kitchin. Information concerning Mr. Kitchin is set forth above under the heading Item 10. Directors and Executive Officers of the
RegistrantDirectors.



Craig R.
Kitchin, 35, became Chief Financial Officer of the Company in February 1994, Vice President-Finance in September 1997 and President in November 1998. He joined the Company as its Controller and Treasurer on June 15, 1992, upon receiving his M.B.A
degree from the University of Chicago with concentrations in accounting and finance. Before attending the University of Chicago, he was a financial analyst with FMC Corporation in Santa Clara, California, from 1989 to 1990. Mr. Kitchin is a director
of Train for Change, a charitable organization. Mr. Kitchin graduated from Santa Clara University with a degree in finance in 1989. Craig Kitchin is the son of Thomas W. Kitchin, the Chief Executive Officer of the Company.



Steven A. Curlee, 51, became General Counsel and Secretary of
the Company in January 1993 and Vice President-Legal in September 1997. From April 1985 to July 1992, he was general counsel of an oil and gas company listed on the American Stock Exchange. Prior thereto, he was engaged in the private practice of
law in Tulsa, Oklahoma for five years. From 1976 to 1980, Mr. Curlee served on active duty in the U.S. Navy as a Judge Advocate. Mr. Curlee received a B.A. degree in political science and his J.D. from the University of Arkansas. He received a
Masters of Law in Taxation degree from Georgetown University. Mr. Curlee is admitted to practice law in Arkansas, the District of Columbia, Oklahoma, Texas and Georgia.



William D. Walker, 49, is Vice President-Development of the Company. He has been an officer of the Company
since its inception in 1988 and served as a director from 1988 through October 29, 1993. Prior to joining the Company, he worked in various financial management positions for 12 years. Mr. Walker received a B.B.A. degree in finance from Texas Tech
University in 1975.



Martin D. Brew, 42, has been
an officer of Kitchin Hospitality and the Company since the Signature acquisition in May 1999. He was employed by Signature Inns for 13 years, first as controller and later as treasurer. Mr. Brew was employed by KPMG LLP prior to his employment with
Signature Inns. Mr. Brew has a B.S. degree in business from Indiana University and is a certified public accountant.



45



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Section 16(a) Beneficial
Ownership Reporting Compliance.



Section
16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of our common stock to report their initial ownership of our common stock and any subsequent changes in that ownership to
the Securities and Exchange Commission or the SEC and to furnish us with a copy of each of these reports. SEC regulations impose specific due dates for these reports, and we are required to disclose in this report any failure to file by these dates
during fiscal 2002.



To our knowledge, based
solely on the review of the copies of these reports furnished to us and written representations that no other reports were required, during and with respect to fiscal 2002, all Section 16(a) filing requirements applicable to our executive officers,
directors and more than 10% stockholders were complied with.



ITEM 11. EXECUTIVE COMPENSATION



The following table sets forth certain information with respect to the compensation of Thomas W. Kitchin, our Chief Executive Officer, for services in all capacities to the Company during the fiscal years ended December 31, 2000,
2001 and 2002. No other executive officer of the Company had an annual salary and bonus in excess of $100,000 paid by the Company during any such year. No information is given as to any person for any fiscal year during which such person was not an
executive officer of the Company.



Summary
Compensation Table



|                                                        |  | Annual Compensation |  | Long-Term Compensation Awards
|------------------------------------------------------- |  | ------------------- |  | -----------------------------
|Name and Principal Position                             |  | Year                |  | Salary ($) (1)               
|Thomas W. Kitchin, Chairman and Chief Executive Officer |  | 2002 2001 2000      |  | $                            



---



|(1) |  | Mr. Kitchin holds positions with Kitchin Hospitality, LLC (Kitchin Hospitality), as well as with the Company, and receives compensation from such entity.
The amount set forth in the table represents an allocation to the Company by Kitchin Hospitality of Mr. Kitchins total compensation from both entities based on the estimated time spent by Mr. Kitchin related to the Company. Compensation which
Mr. Kitchin receives from Kitchin Hospitality is not reported in the table. See Certain Relationships and Related Party TransactionsCost Reimbursement Agreement.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Represents the closing price of shares of common stock on the Nasdaq National Market on the date of grant for 20,000 shares of restricted common stock granted in
2001 under the 1993 Stock Incentive Plan. These shares vest over a 10 year period with no vesting until the third anniversary of the grant, at which time the grants will be 30% vested and on each succeeding anniversary an additional 10% will vest.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Represents the closing price of shares of common stock on the Nasdaq National Market on the date of grant for 100,000 shares of restricted common stock granted in
2000 under the Jameson 1996 Stock Incentive Plan. Such shares vest 10 years after the date of grant, assuming continuous employment with the Company through the date of vesting.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



46



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Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values



The named executive officer did not exercise any options during 2002. On December 3, 2002, he tendered stock options covering 150,000 shares to the Company in exchange for payment of $0.01 per share of
common stock subject to the options. The following table sets forth the values of all options held by the named executive officer at December 31, 2002.



|Name              |  | Number of Unexercised Options at Fiscal Year-End |  | Value of Unexercised in-the-Money Options at Fiscal Year-End
|----------------- |  | ------------------------------------------------ |  | ------------------------------------------------------------
|                  |  | Exercisable                                      |  | Unexercisable                                               
|Thomas W. Kitchin |  | 8,000                                            |  | 32,000                                                      



Employment Agreement



On November 29, 2001, the Company entered
into an employment agreement with Thomas W. Kitchin effective as of December 1, 2001. Subject to early termination provisions, the employment agreement is for a two-year term and is subject to an automatic two-year renewal period unless the Company
elects otherwise. The employment agreement provides that the portion of Mr. Kitchins base salary payable by the Company is the base salary multiplied by the percentage that the time Mr. Kitchin devotes to the business of the Company bears to
the time Mr. Kitchin devotes to the business and affairs of the Company, the various Inns owned by the Company and Kitchin Hospitality. Mr. Kitchin is also eligible under the employment agreement to participate in Company incentive, profit sharing,
savings, retirement and welfare benefit plans, and is entitled to expense reimbursement and other fringe benefits.



If Mr. Kitchins employment is terminated by the Company without cause or by Mr. Kitchin for good reason during the term of the
contract, Mr. Kitchin is entitled to the following: (a) two times his annual base salary then in effect and the average of his annual bonuses for the two preceding fiscal years; (b) the vesting of any all restricted stock and options to purchase
Company common stock; (c) certain welfare benefits for two years; (d) any other benefits Mr. Kitchin is entitled to be paid, provided or is otherwise eligible to receive under any plan, program, policy, contract or agreement. In the event Mr.
Kitchin resigns or he terminates his employment for other than good reason, Mr. Kitchin is entitled to an amount equal to his base salary to the date of termination.



The employment agreement provides that in the event the severance payments and other compensation provided
for under the agreement become subject to the excess parachute payment excise tax under the Internal Revenue Code of 1986, as amended, the Company will pay to Mr. Kitchin an additional amount such that the net amount retained by Mr. Kitchin after
deduction of the excise tax and any federal, state or local taxes will equal the total benefits or amounts Mr. Kitchin would otherwise be entitled to under the employment agreement. The employment agreement also provides that the Company will
require any successor to all or substantially all of the business and/or assets of the Company to assume and perform the employment agreement in the same manner that the Company would be required to perform.



Compensation Committee Interlocks and Insider Participation in Compensation
Decisions



The directors who constituted the
Compensation Committee during 2002 are Dr. Robert D. Hisrich, Michael E. Lawrence and Thomas J. OHaren.



47



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Compensation of Directors



We pay each director other than Mr. Kitchin
an annual fee of $10,000. Payment of the annual fee is not contingent upon attendance at board or committee meetings. We also pay $500 for each Board of Directors or board committee meeting attended and reimbursement of expenses incurred in
attending board or committee meetings.



Under our
Director Stock Option Plan (the 1995 Director Plan), each director who is not otherwise an employee of the Company or an employee of any of our subsidiaries or affiliates is granted an option to purchase 25,000 shares of common stock
upon his initial election as director. Dr. Hisrich and Mr. Lawrence, who were elected or appointed as directors prior to the adoption in 1995 of the 1995 Director Plan, each received options to purchase 25,000 shares of common stock upon the
adoption of the 1995 Director Plan in exchange for their surrender and the cancellation of stock options previously granted to each of them under the 1993 Jameson Stock Incentive Plan. Options granted under the 1995 Director Plan vest immediately at
the time of grant and have a per share exercise price equal to the fair market value of a share of common stock at the close of business on the last business day preceding the day of grant. The options granted to Dr. Hisrich and Mr. Lawrence have an
exercise price of $7.25 per share. Mr. OHaren received an option to purchase 25,000 shares of common stock on June 20, 1997, at an exercise price of $11.375.



Under our 1997 Director Stock Option Plan (the 1997 Director Plan), each of our directors who is
serving as a director on the first business day following our annual meeting of stockholders and at such annual meeting was considered as a director who was continuing in office or was reelected as a director and is not otherwise an employee of the
Company or an employee of any of our subsidiaries or affiliates is granted an option to purchase 5,000 shares of common stock as of the first business day following the annual meeting of our stockholders. Options granted under the 1997 Director Plan
vest immediately at the time of grant and have a per share exercise price equal to the fair market value of a share of common stock at the close of business on the last business day preceding the day of grant. Options were granted to Dr. Hisrich,
Mr. Lawrence and Mr. OHaren in November 1997 when the 1997 Director Plan was adopted, with an exercise price of $11.625 per share. On June 29, 1998, May 8, 1999, June 19, 2000, July 2, 2001 and July 1, 2002 each of these directors received
options to purchase 5,000 shares of common stock at exercise prices of $10.00, $9.00, $7.00, $7.29 and $3.55 per share, respectively.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth certain information as of February 28, 2003, regarding (a) the ownership of the Companys common stock
by all persons known by the Company to be beneficial owners of more than five percent of such stock, and (b) the ownership of the Companys common stock, 9.25% Series A Cumulative Preferred Stock, par value $1.00 per share (Series A
Preferred Stock), and $1.70 Series S Cumulative Convertible Preferred Stock, par value $1.00 per share (Series S Preferred Stock), by (i) each director and nominee for director of the Company, (ii) each of the executive officers of
the Company named in the Summary Compensation Table below, and (iii) all executive officers and directors of the Company as a group. Unless otherwise noted, the persons named below have sole voting and investment power with respect to such shares.



48



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|Name of Owner or Identity of Group                                    |  | Shares of Common Stock Beneficially Owned (1) |     |  | Percentage of Class |   |  | Shares of Series A Preferred Stock Beneficially Owned(1) |     |  | Percentage of Class |   |  | Shares of Series S Preferred Stock Beneficially Owned (1) |  | Percentage of Class
|--------------------------------------------------------------------- |  | --------------------------------------------- | --- |  | ------------------- | - |  | -------------------------------------------------------- | --- |  | ------------------- | - |  | --------------------------------------------------------- |  | -------------------
|Thomas W. Kitchin 8 Perimeter Center East Atlanta, Georgia 30346-1604 |  | 623,041                                       | (2) |  | 5.25                | % |  | 72,727                                                   | (3) |  | 5.71                | % |  |                                                          |  |                   
|Robert D. Hisrich(4)
(5)                                              |  | 57,849                                        |     |  | *                   |   |  |                                                         |     |  |                    |   |  |                                                          |  |                   
|Michael E. Lawrence(4)                                                |  | 55,500                                        |     |  | *                   |   |  | 100                                                      |     |  | *                   |   |  |                                                          |  |                   
|Thomas J. OHaren(4)                                                  |  | 91,396                                        |     |  | *                   |   |  |                                                         |     |  |                    |   |  |                                                          |  |                   
|All directors and executive officers as a group (8 persons)(6)        |  | 1,123,761                                     |     |  | 9.32                | % |  | 72,827                                                   |     |  | 5.71                | % |  |                                                          |  |                   

---



|* |  | Less than one percent (1%)
|- |  | --------------------------



|(1) |  | The total number includes shares issued and outstanding as of February 28, 2003, plus shares which the owner shown above has the right to acquire within 60 days
after February 28, 2003. For purposes of calculating the percent of the class outstanding held by each owner shown above with a right to acquire additional shares, the total number of shares excludes the shares which all other persons have the right
to acquire within 60 days after February 28, 2003, pursuant to the exercise of outstanding stock options.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Includes 8,000 shares issuable upon the exercise of currently vested stock options, 46,938 shares owned by Kitchin Childrens Trust, the beneficiaries of which
are members of the family of Mr. Kitchin and of which Mr. Kitchin serves as trustee, 168,459 shares of restricted common stock, and 18,850 shares owned jointly with Mr. Kitchins spouse.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Shares are held by Kitchin Real Estate Investment Company, LLC which is 100% owned by Mr. Kitchin and members of his family.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



|(4) |  | Includes 55,000 shares issuable upon the exercise of currently vested stock options.
|--- |  | ------------------------------------------------------------------------------------



|(5) |  | Includes 849 shares owned by Mr. Hisrichs spouse and children, and 2,000 shares held by a trust for which Mr. Hisrich is the trustee.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | Includes 150,067 shares issuable upon the exercise of currently vested stock options and 416,207 shares of restricted common stock.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------



49



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Equity
Compensation Plan Information



The following
table sets forth certain information as of December 31, 2002 with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.



|Plan category                                              |  | Number of securities to be issued upon exercise of
outstanding options, warrants and rights (a) |  | Weighted-average exercise price of outstanding
options, warrants and rights (b) |      | Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column (a)) (c) |        
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------
|                                                          
|Equity compensation plans approved by security holders     |  | 384,100                                                                                         |  | $                                                                               | 5.88 |                                                                                                                                                 | 871,094
|                                                          
|Equity compensation plans not approved by security holders |  | -0-                                                                                             |  |                                                                                 | -0-  |                                                                                                                                                 | -0-    
|                                                          
|Total                                                      |  | 384,100                                                                                         |  | $                                                                               | 5.88 |                                                                                                                                                 | 871,094



|(1) |  | The number of securities available for issuance under the 1993 Stock Option Plan is equal to 10% of the number of shares of our common stock outstanding. As the
number of shares of our stock outstanding increases, the number of shares available for issuance automatically increases.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The Leases. All of our operating hotel properties or Inns are leased, and future Inns are expected to be leased, to Kitchin Hospitality under several master leases from the various Jameson
entities that hold legal title to the Inns. Kitchin Hospitality is a limited liability company owned 100% by Thomas W. Kitchin, our Chief Executive Officer, Chairman of the Board and director, and members of his family.



The master leases covering our Jameson Inns (collectively, the
Jameson Lease) terminate December 31, 2011, subject to earlier termination upon the occurrence of certain events. The Jameson Lease provides for payment of base rent and, if required based on the formula set forth under the Jameson
Lease, percentage rent. The Jameson Lease requires us to pay real and personal property taxes, general liability and casualty insurance premiums, the cost of maintaining structural elements, including underground utilities, and the cost of
refurbishment of the Jameson Inns. Kitchin Hospitality is required to pay liability insurance premiums, utility costs and all other costs and expenses incurred in the operation of the Jameson Inns. The Leases covering our Signature Inns
(collectively, the Signature Lease) are substantially the same as the Jameson Lease except for the rental calculation. The Signature Lease expires December 31, 2012, subject to earlier termination upon the occurrence of certain events.
In 2002, total rent, including both base rent and percentage rent charged to Kitchin Hospitality by us under the all master leases totaled $42 million.



50



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Turnkey
Construction Contracts. All new Inns and expansions of existing Inns were constructed by Kitchin Hospitality or by its predecessor companies. It is anticipated that Kitchin Hospitality will act as general contractor for new Inns we build as well
as expansions of existing Jameson Inns. All Inns and Inn expansions are constructed by Kitchin Hospitality on a turnkey basis pursuant to construction agreements with us. Kitchin Hospitality also performs all of the construction work for renovations
of existing Inns. We paid Kitchin Hospitality an aggregate of approximately $12.5 million for construction of new Inns, expansions and renovations during the year ended December 31, 2002. Under the construction agreements, if the contract price for
a new Inn or group of Inns or an Inn expansion exceeds Kitchin Hospitalitys costs plus 10%, Kitchin Hospitality is required to refund the excess amount to us. The contract price, as well as the other terms of each construction agreement
submitted by Kitchin Hospitality, are subject to approval by our independent directors.



Cost Reimbursement Agreement.Our officers and employees are also employees of Kitchin Hospitality. Rather than duplicate payroll and certain other administrative functions, we have entered into
and are a party to a Cost Reimbursement Agreement with Kitchin Hospitality which provides that the we will reimburse Kitchin Hospitality, on an actual cost basis, for the employee compensation and overhead costs attributable to us. Our officers and
employees receive their salaries, hourly wages and fringe benefits entirely from Kitchin Hospitality, which also pays our office overhead and other general and administrative costs. Under the Cost Reimbursement Agreement, we determine for each
officer and employee the amount that we would pay in salary and benefits if such person devoted 100% of his or her time to our business. Kitchin Hospitality then determines, subject to our review, the actual percentage of the persons time
devoted to our business and applies that percentage to our established compensation amount. The resulting figure is the amount we reimburse Kitchin Hospitality with respect to officer or employee compensation. Office overhead and other general and
administrative costs are also allocated to and borne by us based primarily on the amount of time spent by these officers and employees on our business. In 2002, these allocations of salary, office overhead and other general and administrative costs
to us totaled approximately $1.6 million.



ITEM 14. CONTROLS AND PROCEDURES



Within 90 days prior to the date of this Form 10-K, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective in timely alerting them to material
information required to be disclosed in our periodic reports filed with the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.



In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the date of their last evaluation.



51



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PART IV



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



(a) 1. Financial Statements of Jameson Inns, Inc.



|Report of Independent Auditors                                                                                     |  | F-1
|------------------------------------------------------------------------------------------------------------------ |  | ---
|                                                                                                                  
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                       |  | F-2
|                                                                                                                  
|Consolidated Statement of Operations for each of the three years ended December 31,
2002, 2001 and 2000            |  | F-3
|                                                                                                                  
|Consolidated Statements of Stockholders Equity for each of the three years ended
December 31, 2002, 2001 and 2000 |  | F-4
|                                                                                                                  
|Consolidated Statements of Cash Flows for each of the three years ended December 31,
2002, 2001 and 2000           |  | F-5
|                                                                                                                  
|Notes to Consolidated Financial Statements                                                                         |  | F-6



2.
Financial Statement Schedules of Jameson Inns, Inc.



|                                                     
|-----------------------------------------------------
|Schedule IIIReal Estate and Accumulated Depreciation
|                                                     
|Notes to Schedule III                                



3.
Financial Statements of Kitchin Hospitality, LLC



|Report of Independent Auditors                                                                                                |  | F-27
|----------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                             
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                  |  | F-28
|                                                                                                                             
|Consolidated Statements of Income and Comprehensive Income for each of the three years ended December 31,
2002, 2001 and 2000 |  | F-29
|                                                                                                                             
|Consolidated Statements of Members Capital (Deficit) for each of the three years ended December 31,
2002, 2001 and 2000      |  | F-30
|                                                                                                                             
|Consolidated Statements of Cash Flows for each of the three years ended December 31,
2002, 2001 and 2000                      |  | F-31
|                                                                                                                             
|Notes to Consolidated Financial Statements                                                                                    |  | F-32



52



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|(a) |  | (3) The following exhibits are filed as part of this Annual Report or incorporated herein by reference:
|--- |  | -------------------------------------------------------------------------------------------------------



|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1           |  | Sales Agency Agreement by and among Jameson Inns, Inc., RGC Brinson Patrick, a division of Ramius Securities, LLC, and
Kitchin Hospitality, LLC (formerly Jameson Hospitality, LLC), dated September 3, 1999, incorporated by reference to Exhibit 1.4 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-3, File No. 333-20143
|              
|3.1           |  | Amended and Restated Articles of Incorporation of the Registrant, as further amended through May 6, 1999, incorporated
by reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year ended December 31, 2001                                                                                                                             
|              
|3.2           |  | Restated Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the
year ended December 31, 2001                                                                                                                                                                                                    
|              
|4.1           |  | Specimen certificate of Common Stock incorporated by reference to Exhibit 4.1 to the Companys Registration
Statement on Form S-11 (File No. 33-71160)                                                                                                                                                                                                
|              
|4.2           |  | Specimen certificate of 9.25% Series A Cumulative Preferred Stock incorporated by reference to Exhibit 1 to the
Registration Statement on Form 8-A filed March 13, 1998 (File No.000-23256)                                                                                                                                                           
|              
|4.3           |  | Specimen certificate of $1.70 Series S Cumulative Convertible Preferred Stock incorporated by reference to Exhibit 1
to the Registration Statement on Form 8-A filed March 26, 1999 (File no. 000-23256)                                                                                                                                              
|              
|10.1          |  | Master Lease Agreement (relating to Jameson Inns) incorporated by reference to Exhibit 10.1to the Annual Report on
Form 10-K for the year ended December 31, 1993                                                                                                                                                                                     
|              
|10.2          |  | Amendment No. 1 to Master Lease Agreement (relating to Jameson Inns) between Jameson Inns., Inc. and Jameson Operating
Company (revised) incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K for the year ended December 31, 1995                                                                                             
|              
|10.3          |  | Amendment No. 2 to Master Lease Agreement (relating to Jameson Inns) between Jameson Inns., Inc. and Jameson Operating
Company (revised) incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K for the year ended December 31, 1996                                                                                             
|              
|10.4          |  | Amendment No. 3 to Master Lease Agreement (relating to Jameson Inns) between Jameson Inns., Inc. and Jameson Operating
Company (revised) incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K for the year ended December 31, 1996                                                                                             
|              
|10.5          |  | Amendment No. 4 to Master Lease Agreement (relating to Jameson Inns) between Jameson Inns., Inc. and Jameson Operating
Company (revised) incorporated by reference to Exhibit 10.5 to the Annual Report filed on Form 10-K for the year ended December 31, 1997                                                                                       



53



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|      
|------
|10.6 
|      
|10.7 
|      
|10.8 
|      
|10.9 
|      
|10.10
|      
|10.11
|      
|10.12
|      
|10.13
|      
|10.14
|      
|10.15
|      
|10.16
|      
|10.17
|      
|10.18



54



---



|10.19 |  | Amendment No. 1 to Jameson 1993 Stock Incentive Plan incorporated by reference to Exhibit 10.10 to the Annual Report
on Form 10-K for the year ended December 31, 1995                                                                                                                                                         
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|10.20 |  | 1994 Amendment to Jameson 1993 Stock Incentive Plan incorporated by reference to Exhibit 10.11 to the Annual Report on
Form 10-K for the year ended December 31, 1995                                                                                                                                                          
|      
|10.21 |  | Amendment No. 3 to Jameson 1993 Stock Incentive Plan incorporated by reference to Exhibit 10.12 to the Annual Report
on Form 10-K for the year ended December 31, 1995                                                                                                                                                         
|      
|10.22 |  | Jameson Inns., Inc. Director Stock Option Plan incorporated by reference to Exhibit 10.13 to the Annual Report on Form
10-K for the year ended December 31, 1995                                                                                                                                                               
|      
|10.23 |  | Jameson 1996 Stock Incentive Plan incorporated by reference to Exhibit 10.45 to the Annual Report on Form 10-K for the
year ended December 31, 1995                                                                                                                                                                            
|      
|10.24 |  | Jameson 1997 Director Stock Option Plan incorporated by reference to Exhibit 10.17 to the Annual Report filed on Form
10-K for the year ended December 31, 1997                                                                                                                                                                
|      
|10.25 |  | Indemnification and Hold Harmless Agreement between Jameson Inns, Inc. and Kitchin Hospitality, LLC (formerly Jameson
Operating Company) incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-11, File No. 33-71160                                                                              
|      
|10.26 |  | Indemnification and Hold Harmless Agreement between Jameson Inns, Inc. and Kitchin Hospitality, LLC (formerly Kitchin
Investments, Inc.) incorporated by reference to Exhibit 10.26 to the Registration Statement on Form S-11, File No. 33-71160                                                                              
|      
|10.27 |  | Form of Indemnification Agreement between Jameson Inns., Inc. and Directors and Officers incorporated by reference to
Exhibit 10.27 to the Registration Statement on Form S-11, File No. 33-71160                                                                                                                              
|      
|10.28 |  | Form of Construction Loan Agreement, Indenture, Security Agreement and Promissory Note for loan from Empire Financial
Services, Inc. to Jameson Inns., Inc. (formerly Jameson Company) for construction of Jameson Inn incorporated by reference to Exhibit 10.39 to the Registration Statement on Form S-11, File No. 33-71160
|      
|10.29 |  | Form of Construction Loan Indenture, Security Agreement, Assignment of Fees and Income, Promissory Note for $4.2
million revolving loan from Empire Financial Services, Inc. to Jameson Inns., Inc. incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 1993          
|      
|10.30 |  | Form of Deed to Secure Debt, Security Agreement, Assignment of Operating Lease, Assignment of Fees and Income,
Promissory Note for loan from Empire Financial Services, Inc. to Jameson Inns., Inc. incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K for the year ended December 31, 1995          



55



---



|10.31 |  | Loan Modification Agreement and Note increasing by $2.6 million the revolving loan from Empire Financial Services,
Inc. to Jameson Inns., Inc. incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K for the year ended December 31, 1995                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|10.32 |  | Deeds to Secure Debt, Mortgages, Assignments and Security Agreements, Assignment of Rents and Leases, Assignments of
Income and Promissory Note for $17,171,717 loan from Bank Midwest, N.A. to Jameson Inns, Inc. secured by 14 separate Jameson Inns incorporated by reference to Exhibit 10.34 to the Registration Statement on Form S-4, File No.
333-74149                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|      
|10.33 |  | Adjustable Rate Note dated June 30, 1996 in the amount of $1,050,000 from Jameson Inns, Inc. to Empire Financial
Services, Inc. for loan on Waynesboro, Georgia Inn incorporated by reference to Exhibit 10.3 to the Report for the quarter ended March 31, 1996                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|      
|10.34 |  | Term Loan Agreement dated as of December 28, 1999, between Jameson Inns, Inc. and First National Bank & Trust;
Mortgage; Security Agreement; Assignment of Rents and Leases; Mortgage Note for $3.7 million incorporated by reference to Exhibit 10.31 to the Annual Report filed on Form 10-K for the year ended December 31, 1999                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|      
|10.35 |  | Loan Agreement between the City of Elkhart, Indiana and Jameson Inns, Inc. dated as of December 1, 1999, relating to
the issuance of $3,305,000 of Adjustable Rate Economic Development Revenue Refunding Bonds, Series 1999; Trust Indenture between City of Elkhart, Indiana and Firstar Bank, N.A. as Trustee, dated as of December 1, 1999; Escrow Deposit Agreement dated
December 22, 1999, by and among Jameson Inns, Inc., the City of Elkhart, Indiana, Bank One Trust Company, NA as Escrow Trustee and Bank One Trust Company, NA as Prior Trustee; Specimen Irrevocable Letter of Credit dated December 22, 1999 for the
benefit of bondholders for the account of Jameson Inns, Inc.; Reimbursement Agreement between Jameson Inns, Inc. and Firstar Bank, N.A. dated December 22, 1999; Mortgage, Assignment of Rents and Security Agreement from Jameson Inns, Inc. to Firstar
Bank, N.A. dated as of December 22, 1999; Assignment of Leases and Rents from Jameson Inns, Inc. to Firstar Bank, N.A. dated as of December 22, 1999; Assignment and Subordination of Master Lease by Jameson Inns, Inc. and Kitchin Hospitality, LLC
(formerly Jameson Hospitality, LLC) for the benefit of Firstar Bank, N.A. dated as of December 22, 1999; Environmental Indemnity Agreement by Jameson Inns, Inc. to and for the benefit of Firstar Bank, N.A. dated as of December 22, 1999; Agreement
with respect to Pledged Bonds by and among Firstar Bank, N.A., as Trustee, Firstar Bank, N.A. as Letter of Credit Bank and Jameson Inns, Inc. dated as of December 1, 1999; Bond Purchase Agreement by and among the City of Elkhart, Indiana, Jameson
Inns, Inc. and Banc One Capital Markets, Inc. dated as of December 21, 1999; Remarketing Agreement between Banc One Capital Markets, Inc. and Jameson Inns, Inc. dated as of December 1, 1999 incorporated by reference to Exhibit 10.32 to the Annual
Report filed on Form 10-K for the year ended December 31, 1999
|      
|10.36 |  | Schedule of documents substantially similar to Exhibit 10.35 incorporated by reference to Exhibit 10.33 to the Annual
Report filed on Form 10-K for the year ended December 31, 1999                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



56



---



|10.37 |  | Loan Agreement dated as of September 27, 2000, between Jameson Inns, Inc. and Geneva Leasing Associates, Inc. for
Signature Inn, Fort Wayne, Indiana; Mortgage, Assignment of Rents, Security Agreement and Financing Statement; and Note for $2,825,000 incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K for the year ended December 31,
2000                                                                                                      
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|10.38 |  | Loan Agreement dated September 27, 2000, between Jameson Inns, Inc. and Republic Bank, Indianapolis, Indiana for
Signature Inn, Indianapolis West; Mortgage, Security Agreement and Fixture Filing; Assignment of Deposits, Leases and Rents; Estoppel Certificate, Subordination and Attonment Agreement; and Promissory Note for $4,745,000 incorporated by reference to
Exhibit 10.39 to the Annual Report on Form 10-K for the year ended December 31, 2000                 
|      
|10.39 |  | Loan Agreement dated December 27, 2000, between Jameson Properties, LLC and First Bank, Peoria, Illinois for Signature
Inn, Normal, Illinois; Mortgage and Security Agreement; Assignment of Leases and Rents; Subordination Agreement; Tenant Estoppel Agreement; Indemnity Agreement; and Promissory Note A for $6,000,000; Promissory Note B for $5,000,000 incorporated by
reference to Exhibit 10.40 to the Annual Report on Form 10-K for the year ended December 31, 2000
|      
|10.40 |  | Schedule of documents substantially similar to Exhibit 10.39 incorporated by reference to Exhibit 10.41 to the Annual
Report on Form 10-K for the year ended December 31, 2000                                                                                                                                                                                                                                                                                                  
|      
|10.41 |  | Open-end Mortgage dated May 16, 2001 between Jameson Inns, Inc. and Cornerstone Bank for Signature Inn, Columbus,
Ohio; Security Agreement, Equipment, Inventory Receivables; Assignment of Rents as Security; Hazardous Substance Indemnity Agreement; Depository Agreement; Promissory Note for $3,900,000; and Addendum to Promissory Note incorporated by reference to
Exhibit 10.42 to the Annual Report on Form 10-K for the year ended December 31, 2000                 
|      
|10.42 |  | Real Estate Mortgage dated March 28, 2001 between Jameson Alabama, Inc. and Empire Financial Services, Inc. for
Jameson Inn, Tuscaloosa, Alabama; Assignment of Lease; Assignment of Operating Lease; Assignment of Fees and Income; Security Agreement; Adjustable Rate Note for $1,500,000; Unconditional Guaranty of Payment and Performance incorporated by reference
to Exhibit 10.43 to the Annual Report on Form 10-K for the year ended December 31, 2000               
|      
|10.43 |  | Schedule of documents substantially similar to Exhibit 10.42 incorporated by reference to Exhibit 10.44 to the Annual
Report on Form 10-K for the year ended December 31, 2000                                                                                                                                                                                                                                                                                                  
|      
|10.44 |  | Loan Agreement dated March 8, 2001, between Jameson Properties, LLC and Bank of Louisville, Louisville, Kentucky, for
Signature Inn, Louisville East; Mortgage and Security Agreement (Fixture Filing Statement); Assignment of Rents and Leases; Subordination Agreement; Promissory Note for $5,000,000; and Guaranty Agreement of Jameson Inns, Inc. incorporated by
reference to Exhibit 10.44 to the Annual Report on Form 10-K for the year ended December 31, 2001       
|      
|10.45 |  | Schedule of documents substantially similar to Exhibit 10.38 incorporated by reference to Exhibit 10.45 to the Annual
Report on Form 10-K for the year ended December 31, 2001                                                                                                                                                                                                                                                                                                  



57



---

|10.46 |  | Schedule of documents substantially similar to Exhibit 10.42 incorporated by reference to Exhibit 10.46 to the Annual
Report on Form 10-K for the year ended December 31, 2001                                                                                                                                                                            
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|10.48 |  | Employment Contract with Thomas W. Kitchin dated November 29, 2001 incorporated by reference to Exhibit 99(d)(4) to
the Schedule TO filed with the SEC on March 20, 2002                                                                                                                                                                                  
|      
|10.49 |  | Employment Contract with Craig R. Kitchin dated November 29, 2001 incorporated by reference to Exhibit 99(d)(5) to the
Schedule TO filed with the SEC on March 20, 2002                                                                                                                                                                                   
|      
|10.50 |  | Employment Contract with William D. Walker dated November 29, 2001 incorporated by reference to Exhibit 99(d)(6) to
the Schedule TO filed with the SEC on March 20, 2002                                                                                                                                                                                  
|      
|10.51 |  | Employment Contract with Steven A. Curlee dated November 29, 2001 incorporated by reference to Exhibit 99(d)(7) to the
Schedule TO filed with the SEC on March 20, 2002                                                                                                                                                                                   
|      
|10.52 |  | Employment Contract with Martin D. Brew dated November 29, 2001 incorporated by reference to Exhibit 99(d)(8) to the
Schedule TO filed with the SEC on March 20, 2002                                                                                                                                                                                     
|      
|10.53 |  | Capital Improvement Contract between Jameson Inns, Inc. and Kitchin Development & Construction Company, LLC (a
wholly owned subsidiary of KH, LLC) dated August 2, 2002 for capital improvement work on Jameson Inns and Signature Inns incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30,
2002
|      
|10.54 |  | Form of Construction Contract between Jameson Inns, Inc. and Kitchin Development and Construction Company, LLC ( a
wholly owned subsidiary of KH, LLC) dated August 2, 2002 incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2002                                                            
|      
|21.1  |  | Subsidiaries of the Registrant incorporated by reference to Exhibit 21.1 to the Annual Report on Form 10-K for the
year ended December 31, 2000                                                                                                                                                                                                           
|      
|23.1  |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                              
|      
|99.1  |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                     
|      
|99.2  |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                     



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



Six reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 2002. On October 16, 2002 Jameson filed an 8-K
reporting that on October 16, 2002 Jameson Inns, Inc. issued a press release announcing September 2002 hotel statistics. On October 21, 2002, Jameson filed an 8-K reporting that on October 21, 2002, Jameson Inns, Inc. issued a press release
announcing third quarter earnings release and conference call. On October 29, 2002, Jameson filed an 8-K reporting that on October 29, 2002, Jameson issued a press release



58



---

announcing a third quarter common dividend. On November 12, 2002, Jameson filed an 8-K reporting that on
November 12, 2002, Jameson Inns, Inc. issued a press release announcing its operating results for the third quarter ended September 30, 2002. On November 18, 2002, Jameson filed an 8-K reporting that on November 18, 2002, Jameson Inns, Inc. issued a
press release announcing October 2002 hotel statistics. On December 16, 2002, Jameson filed an 8-K reporting that on December 16, 2002, Jameson Inns, Inc. issued a press release announcing November 2002 hotel statistics.



59



---



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, in the City of Atlanta, State of Georgia, on March 6, 2003.



JAMESON INNS, INC.By:

/s/    Craig R. KitchinCraig R. Kitchin, President




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



|NAME                                          |  | TITLE                                                                                     |  | DATE         
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | -------------
|/s/    Thomas W. KitchinThomas W. Kitchin     |  | Chairman of the Board of Directors, Chief Executive Officer (principal executive officer) |  | March 6, 2003
|                                             
|/s/    Craig R. KitchinCraig R. Kitchin       |  | President and Chief Financial Officer (principal financial officer)                       |  | March 6, 2003
|                                             
|/s/    Martin D. BrewMartin D. Brew           |  | Treasurer and Chief Accounting Officer (principal accounting officer)                     |  | March 6, 2003
|                                             
|/s/    Robert D. HisrichRobert D. Hisrich     |  | Director                                                                                  |  | March 6, 2003
|                                             
|/s/    Michael E.
LawrenceMichael E.
Lawrence |  | Director                                                                                  |  | March 6, 2003
|                                             
|/s/    Thomas J.
OHarenThomas J.
OHaren     |  | Director                                                                                  |  | March 6, 2003







---



CERTIFICATIONS



I, Thomas W. Kitchin,
certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Jameson Inns, Inc.;
| | -- |  | ----------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: March 6, 2003



/s/    Thomas W. KitchinThomas W. Kitchin Chief Executive Officer










---



I, Craig R. Kitchin, certify
that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Jameson Inns, Inc.;
| | -- |  | ----------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: March 6, 2003



/s/    Craig R. KitchinCraig R. Kitchin President and Chief Financial Officer






---

Report of Independent Auditors



The Board of Directors and Stockholders

Jameson Inns, Inc.



We have audited the accompanying consolidated balance sheets of Jameson Inns, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15(a). These
financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



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



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jameson Inns, Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.



/s/ Ernst & Young LLP



Atlanta, Georgia

February 11, 2003



F-1



---

Jameson Inns, Inc. and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                                                                                |  | December 31, |            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -----------
|                                                                                                                                                                                                |  | 2002         |            
|Assets                                                                                                                                                                                          |  |              |            
|Operating property and equipment                                                                                                                                                                |  | $            | 383,514,505
|Property and equipment held for sale                                                                                                                                                            |  |              | 2,444,950  
|Less accumulated depreciation                                                                                                                                                                   |  |              | (70,776,574
|                                                                                                                                                                                                |  |              |            
|                                                                                                                                                                                                |  |              | 315,182,881
|Cash                                                                                                                                                                                            |  |              | 3,832,477  
|Restricted cash                                                                                                                                                                                 |  |              | 1,449,825  
|Receivable from affiliate                                                                                                                                                                       |  |              | 1,489,814  
|Deferred finance costs, net                                                                                                                                                                     |  |              | 2,823,741  
|Other assets                                                                                                                                                                                    |  |              | 1,728,709  
|                                                                                                                                                                                                |  |              |            
|                                                                                                                                                                                                |  | $            | 326,507,447
|                                                                                                                                                                                                |  |              |            
|Liabilities and Stockholders
Equity                                                                                                                                                            |  |              |            
|Mortgage notes payable                                                                                                                                                                          |  | $            | 222,820,439
|Accounts payable and accrued expenses                                                                                                                                                           |  |              | 282,252    
|Accrued interest payable                                                                                                                                                                        |  |              | 1,037,792  
|Accrued property and other taxes                                                                                                                                                                |  |              | 1,831,285  
|Preferred stock dividends payable                                                                                                                                                               |  |              | 1,667,197  
|                                                                                                                                                                                                |  |              |            
|                                                                                                                                                                                                |  |              | 227,638,965
|Stockholders Equity:                                                                                                                                                                           |  |              |            
|Preferred stock, 1,272,727 shares authorized, 9.25% Series A cumulative preferred stock,
$1 par value, liquidation preference $25 per share, 1,272,727 shares issued and outstanding            |  |              | 1,272,727  
|Preferred stock, 2,256,000 shares authorized, 8.5% Series S cumulative convertible
preferred stock, $1 par value, liquidation preference $20 per share, 2,191,500 shares issued and outstanding |  |              | 2,191,500  
|Common stock, $.10 par value, 40,000,000 shares authorized, 11,862,984 shares
(11,729,914 in 2001) issued and outstanding                                                                       |  |              | 1,186,298  
|Contributed capital                                                                                                                                                                             |  |              | 98,057,292 
|Deferred compensation                                                                                                                                                                           |  |              | (2,812,344 
|Retained deficit                                                                                                                                                                                |  |              | (1,026,991 
|                                                                                                                                                                                                |  |              |            
|Total Stockholders Equity                                                                                                                                                                      |  |              | 98,868,482 
|                                                                                                                                                                                                |  |              |            
|                                                                                                                                                                                                |  | $            | 326,507,447
|                                                                                                                                                                                                |  |              |            



See
accompanying notes.



F-2



---

Jameson Inns, Inc. and Subsidiaries

Consolidated Statements of Operations



|                                                                              |  | Year ended December 31, |           
|----------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                              |  | 2002                    |           
|Lease revenue                                                                 |  | $                       | 42,031,718
|Expenses:                                                                     |  |                         |           
|Property and other taxes                                                      |  |                         | 3,940,685 
|Insurance                                                                     |  |                         | 1,476,067 
|Depreciation                                                                  |  |                         | 19,564,941
|General and administrative expenses                                           |  |                         | 2,366,454 
|Loss on impairment of real estate                                             |  |                         |          
|Early extinguishments of debt                                                 |  |                         | 62,153    
|Amortization of offering costs                                                |  |                         |          
|                                                                              |  |                         |           
|Total expenses                                                                |  |                         | 27,410,300
|                                                                              |  |                         |           
|Income from operations                                                        |  |                         | 14,621,418
|Interest expense                                                              |  |                         | 14,794,134
|Other income                                                                  |  |                         | 32,875    
|                                                                              |  |                         |           
|(Loss) income before discontinued operations and gain(loss) on sale of
assets |  |                         | (139,841  
|Gain (loss) on disposal of real estate                                        |  |                         | 426,141   
|Gain on sale of land                                                          |  |                         | 9,205     
|                                                                              |  |                         |           
|Income (loss) from continuing operations                                      |  |                         | 295,505   
|Discontinued operations:                                                      |  |                         |           
|Income from discontinued operations                                           |  |                         | 308,177   
|Gain on sale of discontinued operations                                       |  |                         | 132,286   
|                                                                              |  |                         |           
|Net income (loss)                                                             |  |                         | 735,968   
|Less preferred stock dividends                                                |  |                         | 6,668,441 
|                                                                              |  |                         |           
|Net (loss) income attributable to common stockholders                         |  | $                       | (5,932,473
|                                                                              |  |                         |           
|Per common share (basic and diluted):                                         |  |                         |           
|(Loss) income before discontinued operations (net of preferred
dividends)     |  | $                       | (0.58     
|Income from discontinued operations                                           |  |                         | 0.05      
|                                                                              |  |                         |           
|Net (loss) income attributable to common stockholders                         |  | $                       | (0.53     
|                                                                              |  |                         |           



See
accompanying notes.



F-3



---

Jameson Inns, Inc. and Subsidiaries

Consolidated Statements of Stockholders Equity



|                                                       |  | Preferred Stock Series A |           | Preferred Stock Series S |   |           | Common Stock |  |   | Contributed Capital |   |  | Deferred Compensation |             |   | Retained Deficit |   |            | Stockholders Equity | 
|------------------------------------------------------ |  | ------------------------ | --------- | ------------------------ | - | --------- | ------------ |  | - | ------------------- | - |  | --------------------- | ----------- | - | ---------------- | - | ---------- | -------------------- | 
|Balance at January 1, 2000                             |  | $                        | 1,272,727 |                          | $ | 2,256,000 |              |  | $ | 1,108,395           |   |  | $                     | 133,315,433 |   |                  | $ | (622,519   | )                    | 
|Issuance of common stock                               |  |                          |          |                          |   |          |              |  |   | 7,211               |   |  |                       | 492,658     |   |                  |   |           |                      | 
|Issuance of restricted stock grants                    |  |                          |          |                          |   |          |              |  |   | 33,450              |   |  |                       | 2,309,935   |   |                  |   | (2,343,385 | )                    | 
|Forfeiture of restricted stock grants                  |  |                          |          |                          |   |          |              |  |   | (340                | ) |  |                       | (27,329     | ) |                  |   | 22,425     |                      | 
|Vesting of restricted stock grants                     |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   | 309,420    |                      | 
|Conversion of Series S preferred stock                 |  |                          |          |                          |   | (64,500   | )            |  |   | 6,708               |   |  |                       | (143,771    | ) |                  |   |           |                      | 
|Common stock dividends ($.98 per share)                |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       | (10,164,096 | ) |                  |   |           |                      | 
|Preferred stock dividends-Series S ($1.70 per share)   |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   |           |                      | 
|Preferred stock dividends  Series A ($2.31 per share) |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   |           |                      | 
|Net income                                             |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   |           |                      | 
|                                                       |  |                          |           |                          |   |           |              |  |   |                     |   |  |                       |             |   |                  |   |            |                      | 
|Balance at December 31, 2000                           |  |                          | 1,272,727 |                          |   | 2,191,500 |              |  |   | 1,155,424           |   |  |                       | 125,782,830 |   |                  |   | (2,634,059 | )                    | 
|Issuance of common stock                               |  |                          |          |                          |   |          |              |  |   | 8,847               |   |  |                       | 659,584     |   |                  |   |           |                      | 
|Issuance of restricted stock grants                    |  |                          |          |                          |   |          |              |  |   | 9,250               |   |  |                       | 636,200     |   |                  |   | (645,450   | )                    | 
|Forfeiture of restricted stock grants                  |  |                          |          |                          |   |          |              |  |   | (530                | ) |  |                       | (38,726     | ) |                  |   | 37,277     |                      | 
|Vesting of restricted stock grants                     |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   | 341,447    |                      | 
|Common stock dividends ($.98 per share)                |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       | (21,133,924 | ) |                  |   |           |                      | 
|Preferred stock dividends-Series S ($1.70 per share)   |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   |           |                      | 
|Preferred stock dividends  Series A ($2.31 per share) |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   |           |                      | 
|Net loss                                               |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   |           |                      | 
|                                                       |  |                          |           |                          |   |           |              |  |   |                     |   |  |                       |             |   |                  |   |            |                      | 
|Balance at December 31, 2001                           |  |                          | 1,272,727 |                          |   | 2,191,500 |              |  |   | 1,172,991           |   |  |                       | 105,905,964 |   |                  |   | (2,900,785 | )                    | 
|Issuance of common stock                               |  |                          |          |                          |   |          |              |  |   | 4,132               |   |  |                       | 107,581     |   |                  |   |           |                      | 
|Issuance of restricted stock grants                    |  |                          |          |                          |   |          |              |  |   | 11,240              |   |  |                       | 396,215     |   |                  |   | (407,455   | )                    | 
|Forfeiture of restricted stock grants                  |  |                          |          |                          |   |          |              |  |   | (2,065              | ) |  |                       | (76,720     | ) |                  |   | 70,992     |                      | 
|Vesting of restricted stock grants                     |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   | 424,904    |                      | 
|Common stock dividends ($.20 per share)                |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       | (8,275,748  | ) |                  |   |           |                      | 
|Preferred stock dividends-Series S ($1.70 per share)   |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   |           |                      | 
|Preferred stock dividends  Series A ($2.31 per share) |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   |           |                      | 
|Net income                                             |  |                          |          |                          |   |          |              |  |   |                    |   |  |                       |            |   |                  |   |           |                      | 
|                                                       |  |                          |           |                          |   |           |              |  |   |                     |   |  |                       |             |   |                  |   |            |                      | 
|Balance at December 31, 2002                           |  | $                        | 1,272,727 |                          | $ | 2,191,500 |              |  | $ | 1,186,298           |   |  | $                     | 98,057,292  |   |                  | $ | (2,812,344 | )                    | 
|                                                       |  |                          |           |                          |   |           |              |  |   |                     |   |  |                       |             |   |                  |   |            |                      | 



See
accompanying notes.



F-4



---



Jameson Inns,
Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                                                |  | Year ended December 31, |            
|--------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -----------
|                                                                                                                |  | 2002                    |            
|Operating activities                                                                                            |  |                         |            
|Net income (loss) from continuing operations                                                                    |  | $                       | 295,505    
|Adjustments to reconcile net income (loss) from continuing operations to cash provided
by operating activities: |  |                         |            
|Depreciation and amortization                                                                                   |  |                         | 20,417,471 
|Stock-based compensation expense                                                                                |  |                         | 417,111    
|Loss on impairment of real estate                                                                               |  |                         |           
|Amortization of offering costs                                                                                  |  |                         |           
|Early extinguishments of debt                                                                                   |  |                         | 62,153     
|(Gain) loss on disposal of property and equipment                                                               |  |                         | (435,346   
|Discontinued operations                                                                                         |  |                         | 501,572    
|Changes in assets and liabilities increasing (decreasing) cash:                                                 |  |                         |            
|Restricted cash                                                                                                 |  |                         |           
|Other assets                                                                                                    |  |                         | (43,579    
|Accounts payable and accrued expenses                                                                           |  |                         | (185,607   
|(Payable) to/receivable from affiliate                                                                          |  |                         | (1,402,777 
|Accrued interest payable                                                                                        |  |                         | (344,192   
|Accrued property and other taxes                                                                                |  |                         | (334,820   
|                                                                                                                |  |                         |            
|Net cash provided by operating activities                                                                       |  |                         | 18,947,491 
|Investing activities                                                                                            |  |                         |            
|Reductions (Additions) to restricted cash for FF&E reserves                                                     |  |                         | 748,601    
|Proceeds from disposition of land, property and equipment                                                       |  |                         | 6,527,700  
|Additions to property and equipment                                                                             |  |                         | (12,541,184
|                                                                                                                |  |                         |            
|Net cash used in investing activities                                                                           |  |                         | (5,264,883 
|Financing activities                                                                                            |  |                         |            
|Common stock dividends paid                                                                                     |  |                         | (2,343,275 
|Preferred stock dividends paid                                                                                  |  |                         | (6,668,441 
|Proceeds from issuance of preferred and common stock, net of offering
expense                                   |  |                         | 111,713    
|Proceeds from Series S preferred stock                                                                          |  |                         |           
|Proceeds from mortgage notes payable                                                                            |  |                         | 11,968,261 
|Payment of deferred finance costs                                                                               |  |                         | (195,715   
|Payoff of mortgage notes payable                                                                                |  |                         | (7,397,159 
|Payments on mortgage notes payable                                                                              |  |                         | (8,813,308 
|                                                                                                                |  |                         |            
|Net cash (used in) provided by financing activities                                                             |  |                         | (13,337,924
|Net change in cash                                                                                              |  |                         | 344,684    
|Cash at beginning of year                                                                                       |  |                         | 3,487,793  
|                                                                                                                |  |                         |            
|Cash at end of year                                                                                             |  | $                       | 3,832,477  
|                                                                                                                |  |                         |            
|Supplemental information                                                                                        |  |                         |            
|Interest paid                                                                                                   |  | $                       | 14,140,718 
|State income and franchise taxes paid                                                                           |  | $                       | 350,478    



See
accompanying notes.



F-5



---

Jameson Inns, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31,
2002



|1. |  | Business and Basis of Financial Statements
|-- |  | ------------------------------------------



Jameson Inns, Inc. (the Company) develops and owns limited service hotel properties (the Inns) operating under the trademark
The Jameson Inn®. In addition, the Company owns Inns in the midwestern United States operating under
the trademark Signature Inns®. In this report, we refer to the Inns operating under the Jameson
trademark as Jameson Inns and to those operating under the Signature trademark as Signature Inns.



At December 31, 2002, there were 96 Jameson Inns in operation and 25 Signature Inns in operation with a total of 8,281 rooms in fourteen states compared
to 98 Jameson Inns in operation and 26 Signature Inns in operation with a total of 8,355 rooms at December 31, 2001.



|2. |  | Accounting Policies
|-- |  | -------------------



The Company has several business relationships with Kitchin Hospitality, LLC (KH), including contracts to construct the new Inns, and expand
and renovate existing Inns (see Note 10), the leases to operate the Inns (see Note 4) and the leases to use the Companys billboards for advertising. KH is wholly-owned by Thomas W. Kitchin, chairman and chief executive officer of the Company,
and members of his family including Craig Kitchin, our President and Chief Financial Officer.



The Companys principal business includes arranging construction and permanent financing, land acquisition, ownership and leasing of the Inns and billboards, capital improvements to the Inns, and
acquisition and replacement of furniture, fixtures and equipment for the Inns.



Use of 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 amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.



Reclassifications



Certain amounts in the 2001 and 2000 financial statements
have been reclassified to conform to the 2002 presentation.



F-6



---

Property and Equipment



Costs incurred to acquire and open new Inn locations or to expand or renovate existing Inns are capitalized as property costs
and amortized over their depreciable life. The Company also capitalizes construction period interest costs and real estate taxes. Interest costs of $58,828 and $490,411 were capitalized in 2002 and 2001, respectively.



Property and equipment used in Inn operations is depreciated using the
straight-line method generally over 31.5 to 39 years (buildings), 15 years (land improvements) and three to five years (furniture, fixtures and equipment). Billboards are depreciated over ten years.



The Companys long-lived assets, including the Inns, are individually
evaluated for impairment when conditions exist that indicate that it is probable that the sum of the related expected future cash flows (on an undiscounted basis) are less than the historical net cost basis. Upon determination that a permanent
impairment has occurred, the related assets are reduced to their fair value. For properties the Company considers held for sale an impairment loss is recognized when the fair value of the property, less the estimated cost to sell, is less than the
carrying amount of the asset. Held for sale assets are reported at the lower of the carrying amount or the estimated fair value, less the cost to sell. Subsequent to the date that an asset is held for sale, depreciation expense is not recorded.



Deferred Finance Costs



Deferred finance costs represent fees and other expenses incurred to obtain
long-term debt financing on the Inn facilities and are amortized to expense over the terms of the loans, beginning with the opening of the Inn. Amortization of deferred finance costs is $852,530 and is included in interest expense in the
consolidated statements of operations. Accumulated amortization totaled $2,180,198 and $1,487,577 as of December 31, 2002 and 2001, respectively.



Income Taxes



The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the Code), and has operated as such since
January 1, 1994. As a result, the Company is not subject to federal income taxes to the extent that it distributes annually at least 90% (95% in 2000 and 1999) of its net taxable income to its shareholders and satisfies certain other requirements
defined in the Code.



The Company uses the liability method of
accounting for income taxes, which amounts have not been material since the REIT election.



Stock-Based Compensation



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



F-7



---

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



|                                                                                                                                            |  | 2002 |        |   | 2001 |   |        | 2000 | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- | 
|Net (loss) income attributable to common stockholders                                                                                       |  | $    | (5,932 | ) |      | $ | (9,737 | )    | 
|Less: total stock-based employee compensation expense determined under fair value based
method for all awards granted since January 1, 1995 |  |      | 47     |   |      |   | (37    | )    | 
|                                                                                                                                            |  |      |        |   |      |   |        |      | 
|Pro forma net (loss) income attributable to common stockholders (in
000s)                                                                  |  | $    | (5,885 | ) |      | $ | (9,774 | )    | 
|                                                                                                                                            |  |      |        |   |      |   |        |      | 
|Pro forma (loss) income per share-basic and diluted                                                                                         |  | $    | (.52   | ) |      | $ | (.87   | )    | 
|                                                                                                                                            |  |      |        |   |      |   |        |      | 



The Company recognized
compensation expense of $417,114, $339,468, and $304,176 for the years ended December 31, 2002, 2001 and 2000 related to the vesting of restricted stock.



Financial Instruments



The Company considers its cash, restricted cash and mortgage notes payable to meet the definition of financial instruments as prescribed by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. At December 31, 2002 and 2001, the carrying value of the Companys financial instruments approximated their fair value.



Restricted Cash



At December 31, 2002 and 2001, the restricted cash balance represents cash on
deposit that is restricted under the requirements of various mortgage loan agreements.



Principles of Consolidation



Intercompany transactions among the entities included in the consolidated financial statements have been eliminated. As of December 31, 2002, the Company had one wholly-owned and two 99.8%-owned qualified real estate investment trust
subsidiaries. Various companies wholly-owned by the Companys Chairman and CEO and members of his family own the remaining 0.2% of these two subsidiaries.



Revenue Recognition



The Company recognizes lease revenues when they are earned. The master leases call for base rent to be earned and due on a monthly basis. Percentage rent
is calculated on a quarterly basis, with quarterly payments (see Note 4). Percentage rents are considered earned when the changes in factors on which the contingent rents are based actually occur.



F-8



---

Earnings Per Share



Net (loss) income attributable to common stock is reduced by all preferred stock dividends declared through the end of the
period to derive net (loss) income attributable to common stockholders.



Basic earnings per share is calculated using weighted average shares outstanding less issued and outstanding but unvested restricted shares of Common Stock.



Diluted earnings per share is calculated using weighted average shares outstanding plus the dilutive effect of outstanding
shares of Preferred Stock, outstanding restricted shares of Common Stock and outstanding stock options, using the treasury stock method and the average stock price during the period.



Recent Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. The Companys adopted this standard on January 1, 2002.



In August 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. See Note 7 for a discussion of
the effect of SFAS No. 144 on the Companys financial statements.



In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS Nos. 4,44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections(SFAS No. 145). SFAS 145 prevents gains or losses on extinguishments of
debt not meeting the criteria of APB 30 to be treated as extraordinary. SFAS 145 is effective for fiscal years beginning after May 15, 2002 but has been adopted by the Company for the year ended December 31, 2002. The adoption of SFAS 145 results in
the Companys reclassification of losses on extinguishments of debt as a component of continuing operations.



On December 31, 2002, the FASB issued Accounting for Stock-Based Compensation(SFAS No. 148) amending SFAS No. 123, to provide
alternative methods of transition to the fair value method of accounting for stock-based employee compensation. The three methods provided in SFAS No. 148 include (1) the prospective method which is the method currently provided for in SFAS No. 123,
(2) the retroactive restatement method which would allow companies to restate all periods presented and (3) the modified prospective method which would allow companies to present the recognition provisions of all outstanding stock based employee
compensation instruments as of the beginning of the fiscal year of adoption. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to account for
their employee stock-based awards using the fair value method. However, the disclosure provisions are required for all companies with stock-based employee compensation, regardless of whether they utilize the fair method of accounting described in
SFAS No. 123 or the intrinsic value method described in APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company adopted this statement on December 31, 2002.



F-9



---

|3. |  | Property and Equipment
|-- |  | ----------------------



Property and equipment consists of the following at December 31:



|                                          |  | 2002 |             |   | 2001 |  
|----------------------------------------- |  | ---- | ----------- | - | ---- | -
|Land and improvements                     |  | $    | 58,189,077  |   |      | $
|Buildings                                 |  |      | 268,866,549 |   |      |  
|Furniture, fixtures and equipment         |  |      | 53,039,861  |   |      |  
|Billboards                                |  |      | 2,783,472   |   |      |  
|Construction in process                   |  |      | 635,546     |   |      |  
|                                          |  |      |             |   |      |  
|Operating property and equipment          |  |      | 383,514,505 |   |      |  
|Property and equipment held for sale, net |  |      | 2,444,950   |   |      |  
|Accumulated depreciation                  |  |      | (70,776,574 | ) |      |  
|                                          |  |      |             |   |      |  
|                                          |  | $    | 315,182,881 |   |      | $
|                                          |  |      |             |   |      |  



The Company recognizes
impairment losses on long-lived assets used in operations or held for sale when indicators of impairment are present and the expected future results estimated to be generated by those assets are less than the assets carrying amount. During
2001, impairment losses of $2,110,000 were recognized. No impairment losses were recorded in 2002.



During 2002 and 2001, the Company disposed of some of its 40-room, exterior corridor Jameson Inn hotels and one Signature Inn hotel located in markets that have mostly been under-performing and did not
meet its investment criteria. During 2002, the Company sold four properties resulting in net gains of $426,000. Additionally, two tracts of land were sold in 2002 resulting in net gains of $9,000. During 2001, the Company sold eleven properties that
did not meet its investment criteria, resulting in net gains of $903,000. Additionally, a tract of land was sold in 2001 resulting in a gain of $197,000.



Property and equipment held for sale is net of accumulated depreciation of $584,707 and $2,451,741 at December 31, 2002 and 2001, respectively.



|4. |  | The Leases
|-- |  | ----------



The Company has entered into master leases, whereby all of the operating Inns are leased to KH. Therefore, the majority of the lease revenue is derived
from these leases. Approximately $702,000, $734,000 and $680,000 in 2002, 2001, and 2000, respectively, of the lease revenue is related to the billboards the Company leases to KH and other advertisers.



The Jameson and Signature leases, which expire December 31, 2011 and December
31, 2012, respectively, provide for payment of Base Rent plus Percentage Rent. Base Rent is payable monthly and equals $264 and $394 per month per room available at the beginning of the relevant month for the Jameson Inns and Signature Inns,
respectively.





F-10



---

Percentage Rent is payable quarterly and is calculated as a percentage of the total amount of room rental
and certain other miscellaneous revenues realized by KH during the relevant period less base rent paid for such period. For Jameson Inns, the percentage is 39% of such revenues up to $23.01 per day per room in 2002, plus 65% of all additional
average daily room rental revenues. For Signature Inns, the percentage is 37% of such revenues up to $38.61 per day per room in 2002, plus 65% of the next $10.00 of average daily per room rental revenues; plus 70% of all additional average daily
room rental revenues.



Total rent for the Jameson Inns in any
calendar year may not exceed 47% of total room rental revenues for that year. The $23.01 and $38.61 per room amount, for Jameson Inns and Signature Inns, respectively, used in calculating percentage rent is subject to adjustment each year based on
changes in the Consumer Price Index and as of January 1, 2003 was $23.57 and $39.55 for Jameson Inns and Signature Inns, respectively.



Base rent totaled $30,980,783, $31,279,152 and $28,900,248 in 2002, 2001 and 2000, respectively. Percentage rent totaled $11,087,135, $11,597,800, and
$13,651,822 in 2002, 2001 and 2000, respectively.



The Leases
require the Company to pay real and personal property taxes, casualty and liability insurance premiums and the cost of maintaining structural elements, including underground utilities and the cost of replacing or refurbishing the furniture, fixtures
and equipment in the Inns. The Company intends to maintain cash reserves or sufficient access to borrowings equal to 4% of room revenues of KH, less amounts expended to date, to fund the Companys future capital expenditures for such
replacements and refurbishments. KH is required to pay all other costs and expenses incurred in the operations of the Inns.



The Company leases the billboards to KH and other advertisers. The table below indicates anticipated income for the next five years on these billboard
leases:



|2003  |  | $ | 694,714  
|----- |  | - | ---------
|2004  |  |   | 647,740  
|2005  |  |   | 657,722  
|2006  |  |   | 283,504  
|2007  |  |   | 197,377  
|      |  |   |          
|Total |  | $ | 2,481,057
|      |  |   |          



F-11



---

|5. |  | Mortgage Notes Payable
|-- |  | ----------------------



As of December 31, mortgage notes payable consist of:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 2002 |             | 2001
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | ----
|Notes payable:                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |      |             |     
|Terms ranging from four to twenty-one years, due in monthly installments of principal
and interest with remaining unpaid balances payable at maturity, which range from 2003 to 2019. Interest rates are adjusted annually and range from 4.25% to 9.5% and are mainly adjustable to a spread above the prime rate or Treasury securities at
December 31, 2002. Secured by mortgages on 104 Inns.                                                            |  | $    | 190,726,276 |     
|Term of twenty years and interest accrues at 3.75% above a weekly average yield on
Treasury securities, adjusted annually (6.10% at December 31, 2002). Principal and interest payments are due monthly through maturity in 2019. Secured by mortgages on 12 Inns.                                                                                                                                                                                           |  |      | 17,859,165  |     
|Terms of seventeen years due in annual installments of principal and monthly
installments of interest with any unpaid balances payable in December 2016. Interest rates are adjusted weekly and were 1.85% at December 31, 2002. Secured by mortgages on 4 Inns and Letters of Credit.                                                                                                                                                                       |  |      | 11,115,000  |     
|Term of five years due in monthly installments of principal and interest with unpaid
balance payable at maturity in December 2004. Interest rate is fixed at 9.50%. Secured by Company billboards.                                                                                                                                                                                                                                                           |  |      |            |     
|Line of credit:                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |      |             |     
|$2.0 million line of credit secured by billboards. At December 31, 2002, the Company had
$1.99 million available to borrow. The line bears interest at prime plus 1.0% with a floor of 4.25% and cap of 6.25% (6% at December 31, 2002). Payments of interest are due monthly with the principal balance payable upon maturity in December
2003.                                                                                                             |  |      | 6,139       |     
|Construction obligations:                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |      |             |     
|$4.4 million total commitments. As of December 31, 2002, $261,000 was available for
borrowing. The construction loans have terms of seven years and are due in monthly installments of interest only for 18 months and principal and interest using a 20-year amortization period until maturity in 2008. Interest rates are adjusted
annually to the then prevailing prime rate plus .375% to .5% with a floor of 7.125%. Secured by 1 Inn and 1 expansion. |  |      | 3,113,859   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |             |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $    | 222,820,439 |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |             |     



At December 31, 2002 and
2001, all of the Companys net book value of its investment in properties collateralized the mortgage notes payable. At December 31, 2002 and 2001, the carrying value of the long-term debt approximated its fair value.



F-12



---



At December 31, 2002 there are
letters of credit aggregating $11.1 million which were issued for our benefit as collateral for outstanding Adjustable Rate Economic Development Revenue Refunding Bonds, series 1999, which are scheduled to mature on December 1, 2016. These letters
of credit must be renewed each year in order for the Bonds to be remarketed by the marketing agent. These letters of credit expire on December 31, 2003 and are included in the 2003 scheduled aggregate principal payments.



The following table summarizes the scheduled aggregate principal payments for
the five years subsequent to December 31, 2002:



|2003       |  | $ | 23,910,060 
|---------- |  | - | -----------
|2004       |  |   | 18,882,998 
|2005       |  |   | 45,338,419 
|2006       |  |   | 56,149,723 
|2007       |  |   | 29,154,643 
|Thereafter |  |   | 49,384,596 
|           |  |   |            
|           |  | $ | 222,820,439
|           |  |   |            



As a result of the early
extinguishment of certain debt, the Company incurred losses of $62,153, $341,081, and $87,816 in 2002, 2001, and 2000, respectively, comprised of the unamortized deferred finance costs and prepayment penalties.



During 2002, the weighted average interest rate on debt was 6.1% compared to
8.3% during 2001 and 8.2% during 2000.



|6. |  | Stockholders Equity
|-- |  | --------------------



Preferred Stock



The Company has 2,191,500 shares of 8.5% Series S Cumulative Convertible Preferred Stock (Series S Preferred Stock) outstanding and 1,272,727
shares of 9.25% Series A Cumulative Preferred Stock (Series A Preferred Stock) outstanding. The Series S and Series A Preferred Stock is senior to all shares of the Companys common stock.



Dividends on the Series S and Series A Preferred Stock are cumulative from the
date of original issue and are payable quarterly in arrears on or about the 20th day of January, April, July and October to shareholders of record on the last business day of December, March, June and September at the fixed rate of 9.25% per annum
of the liquidation preference of $25 per share (equivalent to a fixed annual rate of $2.3125 per share) for the Series A Preferred Stock and at the fixed rate of 8.5% per annum of the liquidation preference of $20 per share (equivalent to a fixed
annual rate of $1.70 per share) for the Series S Preferred Stock.



F-13



---



Holders of Series S and Series
A Preferred Stock generally will have no voting rights except as required by law. In addition, certain changes to the terms of the Series A and Series S Preferred Stock that would be materially adverse to the rights of holders of the Series A and
Series S Preferred Stock cannot be made without the affirmative vote of holders of at least a majority of the outstanding Series A and Series S Preferred Stock.



The Series S Preferred Stock is convertible into the Companys common stock, at the option of the holder at the stated
Conversion Price (as defined). Additionally, at any time after February 1, 2000, the Company has the right to redeem any, or all, of the Series S Preferred Stock, plus accrued and unpaid dividends, at the Redemption Price, as defined, which ranges
from $20.00 to $20.97 per share (depending on the date of redemption). The holders do not have the option to redeem the Series S Preferred Stock. During 2000, 64,500 shares of the Series S Preferred Stock were converted into common stock. No shares
were converted in 2002 or 2001.



The Series A Preferred Stock is
not convertible into or exchangeable for any other property or securities.



Upon the occurrence of a Change of Control Event, as defined, at any time prior to March 18, 2003, the Company may redeem all of the outstanding Series A Preferred Stock at a purchase price ranging from $25.00 to $26.05 per share
(depending on the date of the redemption), plus accrued and unpaid dividends (if any) to the date of redemption. Except in certain circumstances relating to preservation of the Companys status as a REIT and in connection with a change of
control of the Company, the Series A Preferred Stock is not redeemable prior to March 18, 2003. On and after such date, the Series A Preferred stock will be redeemable for cash at the option of the Company, in whole or in part, at a redemption price
of $25 per share, plus dividends accrued and unpaid to the redemption date (whether or not declared) without interest.



Stock Options



The Company has four stock compensation plans. The Company adopted the 1993 Stock Incentive Plan (1993 Plan) to provide incentives to attract
and retain officers and key employees of both the Company and KH. This Plan provides for a number of shares equal to 10% of the Companys outstanding common shares (excluding shares issued pursuant to exercises of options granted under this
Plan). In 1996, the Jameson 1996 Stock Incentive Plan (1996 Plan) was adopted and 500,000 additional shares were reserved for issuance. As of December 31, 2002 the Company had a total of 2,036,298 shares authorized for issuance,
including 686,094 shares available for future option grants or restricted stock grants under the 1993 and 1996 Plans. During 2002, the Company purchased at a nominal cost of $0.01 per option share pursuant to a tender offer 604,833 options to
purchase shares of common stock issued under the 1993 Plan.



F-14



---

The Director Stock Option Plan (1995 Director Plan) reserved 150,000 shares of Common Stock to
attract and retain qualified independent directors. This plan provides that, upon election to the Board of Directors, each director will receive options to purchase 25,000 shares of common stock at the then current market price; such options are
fully vested upon issuance. In addition, the Company adopted the 1997 Director Stock Option Plan (1997 Director Plan) which reserved 200,000 shares of Common Stock and provides that at the time of the Companys approval of the plan
and subsequently upon each annual shareholders meeting, each independent director will also be granted an option to purchase 5,000 shares at the then current market price with all shares becoming fully vested upon issuance. As of December 31, 2002,
options covering up to 185,000 shares are available for future grants under the 1995 Director Plan and the 1997 Director Plan.



A summary of the stock option activity follows:



|                                      |  | Number of Shares |   |  | Range of Exercise Price Per
Share |                | Weighted Average Exercise Price Per Share
|------------------------------------- |  | ---------------- | - |  | --------------------------------- | -------------- | -----------------------------------------
|Options outstanding December 31, 1999 |  | 889,971          |   |  | $                                 | 6.95  $11.75  |                                          
|Granted in 2000                       |  | 130,500          |   |  | $                                 | 6.94  $  7.25 |                                          
|Forfeited in 2000                     |  | (99,750          | ) |  | $                                 | 6.65  $11.63  |                                          
|                                      |  |                  |   |  |                                   |                |                                          
|Options outstanding December 31, 2000 |  | 920,721          |   |  | $                                 | 6.94  $11.75  |                                          
|                                      |  |                  |   |  |                                   |                |                                          
|Granted in 2001                       |  | 210,000          |   |  | $                                 | 3.30  $  7.29 |                                          
|Forfeited in 2001                     |  | (111,288         | ) |  | $                                 | 6.65  $11.63  |                                          
|                                      |  |                  |   |  |                                   |                |                                          
|Options Outstanding December 31, 2001 |  | 1,019,433        |   |  | $                                 | 3.30  $11.75  |                                          
|                                      |  |                  |   |  |                                   |                |                                          
|Granted in 2002                       |  | 15,000           |   |  | $                                 | 7.56  $  7.56 |                                          
|Forfeited in 2002                     |  | (45,500          | ) |  | $                                 | 3.30  $11.75  |                                          
|Cancelled in 2002                     |  | (604,833         | ) |  | $                                 | 6.65  $11.75  |                                          
|                                      |  |                  |   |  |                                   |                |                                          
|Options Outstanding December 31, 2002 |  | 384,100          |   |  | $                                 | 3.30  $11.75  |                                          
|                                      |  |                  |   |  |                                   |                |                                          
|Options Exercisable:                  |  |                  |   |  |                                   |                |                                          
|Granted prior to 1999                 |  | 122,000          |   |  | $                                 | 7.25  $11.75  |                                          
|Granted in 1999                       |  | 23,460           |   |  | $                                 | 7.13  $  9.13 |                                          
|Granted in 2000                       |  | 15,800           |   |  | $                                 | 7.19  $  7.56 |                                          
|Granted in 2001                       |  | 52,000           |   |  | $                                 | 3.30  $  6.53 |                                          
|Granted in 2002                       |  | 15,000           |   |  | $                                 | 3.65  $  3.65 |                                          
|                                      |  |                  |   |  |                                   |                |                                          
|Options Exercisable December 31, 2002 |  | 228,260          |   |  |                                   |                |                                          
|                                      |  |                  |   |  |                                   |                |                                          



The average contractual
life remaining on options outstanding at December 31, 2002 was 7.32 years.



F-15



---



In 2002, the Company made a
tender offer for outstanding options to purchase shares of common stock issued under the 1993 stock incentive plan at a nominal price of $.01 per option share. As a result of this tender offer, options to purchase 604,833 shares of common stock were
tendered and cancelled during 2002.



Pro Forma Effects of
Stock-Based Compensation



Pro forma information regarding
net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its stock options and restricted stock granted subsequent to December 31, 1994, using the fair
value method prescribed by that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 2002, 2001 and 2000; risk-free interest rates of 4.1% to
6.8%; a dividend yield of 6.12%, 5.18% and 10% respectively; a volatility factor of the expected market price of the Companys common stock of .404, .199 and .151, respectively; and an expected life of the option of 3 to 10 years.



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



Restricted Stock



In 2002 and 2001 the Company awarded 112,400 and 92,500 shares respectively, of common stock to certain officers and employees of the Company, under the
provisions of the 1993 Plan. No shares were issued in 2000 under the 1993 plan. 13,000 shares of the 2002 grant and all of the shares from the 2001 grant vest over a ten-year period, with no vesting until the third anniversary of the grant, at which
time the grants will be vested 30%, on each succeeding anniversary an additional 10% will vest, assuming the individual is continuously employed by the Company on each vesting date. The remaining 103,250 shares of the 2002 grant vest at 20% per year
for five years.



In 2000, the Company awarded 334,500 shares of
Common Stock to certain officers and employees of the Company, under the provisions of the 1996 Plan. The shares vest ten years after date of grant, assuming the individual is employed by the Company at that date.



F-16



---



Holders are entitled to all
dividends prior to forfeiture under these plans. As of December 31, 2002, 590,920 restricted shares of common stock remain outstanding under the 1993 and 1996 Plans.



Compensation expense resulting from the stock award is calculated as the fair value of the restricted shares at the date of
grant based on the market price at date of grant, and is being recorded over the five or ten-year vesting periods using the straight line method, net of forfeitures. The expense recorded was $417,114 in 2002, $339,468 in 2001 and $304,176 in 2000.



Dividend Reinvestment Plans



In April 1995, the Company registered 200,000 shares of common stock for
purchase under the Dividend Reinvestment and Stock Purchase Plan. In 2001, we registered an additional 200,000 shares of our common stock. These plans allow existing shareholders to reinvest their dividends in additional shares purchased at a 5%
discount from the average market price of the shares. The plans also allow existing shareholders to make additional cash purchases at the current market price of common stock of up to $5,000 per calendar quarter. During 2002, 2001 and 2000, 44,226,
87,632 and 72,102, shares, respectively, were purchased through dividend reinvestments and additional cash purchases, resulting in net proceeds to the Company of $111,713, $668,431, and $499,869, respectively. At December 31, 2002, 71,724 shares
were available for purchase under the 2001 plan.



|7. |  | Discontinued Operations and Property and Equipment Held for Sale
|-- |  | ----------------------------------------------------------------



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



F-17



---



The components of income from
operations related to discontinued operations for the years ended December 31, 2002, 2001 and 2000 are shown below. These include the results of operations through the date of each respective sale for sold properties and a full period of operations
for those assets held for sale for the respective periods.



|                                                            |  | Year ended December 31,
|----------------------------------------------------------- |  | -----------------------
|                                                            |  | 2002                   
|Lease revenues                                              |  | $                      
|Expenses:                                                   |  |                        
|Property and other taxes                                    |  |                        
|Insurance                                                   |  |                        
|Depreciation                                                |  |                        
|                                                            |  |                        
|Total expenses                                              |  |                        
|                                                            |  |                        
|Income from discontinued operations before interest expense |  |                        
|Interest expense                                            |  |                        
|                                                            |  |                        
|Income from discontinued operations                         |  | $                      
|                                                            |  |                        



The Company recorded net
gains on disposals of approximately $132,000 related to the asset sold in 2002 which met the criteria under SFAS 144.



Based on a review of its investment portfolio at December 31, 2002, the Company had one property under contract. Accordingly, the Company has decided to
sell the property and therefore the property is classified as held for sale in the accompanying balance sheet. At December 31, 2001, the Company had five operating hotel properties recorded as held for sale. The hotel properties held for sale are
recorded at the lower of cost or fair value less anticipated selling costs. The 2001 impairment charge of $2,110,000 includes a reserve of $767,370 related to these properties at December 31, 2001. The dispositions of two of these properties were
accounted for under SFAS No. 121. The remaining three properties were recorded in operating property and equipment in January 2002 with the adoption of SFAS No. 144.



F-18



---



|8. |  | Earnings Per Share
|-- |  | ------------------



The following table sets forth the computation of basic and diluted (loss) income per share:



|                                                                                                  |  | 2002 |            |   | 2001 |   |            | 2000 | 
|------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- | 
|Numerator                                                                                         |  |      |            |   |      |   |            |      | 
|Net income (loss)                                                                                 |  | $    | 735,968    |   |      | $ | (3,068,617 | )    | 
|Preferred stock dividends                                                                         |  |      | (6,668,441 | ) |      |   | (6,668,740 | )    | 
|                                                                                                  |  |      |            |   |      |   |            |      | 
|Numerator for basic (loss) income per share-income available to common
stockholders               |  | $    | (5,932,473 | ) |      | $ | (9,737,357 | )    | 
|                                                                                                  |  |      |            |   |      |   |            |      | 
|Denominator                                                                                       |  |      |            |   |      |   |            |      | 
|Weighted average shares outstanding                                                               |  |      | 11,826,769 |   |      |   | 11,657,387 |      | 
|Less: Unvested restricted shares                                                                  |  |      | (576,748   | ) |      |   | (481,188   | )    | 
|                                                                                                  |  |      |            |   |      |   |            |      | 
|Denominator for basic income per share                                                            |  |      | 11,250,021 |   |      |   | 11,176,199 |      | 
|Plus: Effect of dilutive securities:                                                              |  |      |            |   |      |   |            |      | 
|Employee and director stock options                                                               |  |      |           |   |      |   |           |      | 
|Unvested restricted shares                                                                        |  |      |           |   |      |   |           |      | 
|                                                                                                  |  |      |            |   |      |   |            |      | 
|Total dilutive potential common shares                                                            |  |      |           |   |      |   |           |      | 
|                                                                                                  |  |      |            |   |      |   |            |      | 
|Denominator for diluted income per share-adjusted weighted average shares and assumed
conversions |  |      | 11,250,021 |   |      |   | 11,176,199 |      | 
|                                                                                                  |  |      |            |   |      |   |            |      | 
|Basic and diluted (Loss) Income Per Common Share                                                  |  |      |            |   |      |   |            |      | 
|Net (loss) income attributable to common stockholders                                             |  | $    | (0.53      | ) |      | $ | (0.87      | )    | 
|                                                                                                  |  |      |            |   |      |   |            |      | 



Options to purchase
384,100, 484,433 and 522,471, shares of Common Stock during 2002, 2001 and 2000, respectively, were all outstanding but were not included in the computation of diluted earnings per share because the securities exercise price was greater than
the average market price of the common shares and, therefore, the effect would be antidilutive. Additionally, for all periods presented, the potential conversion of the Series S Preferred Stock was not included in the computation of diluted earnings
per share as the effect of conversion would be antidilutive.



F-19



---



|9. |  | Income Taxes
|-- |  | ------------



The Company recorded no provision for federal income taxes in 2002, 2001 and 2000 due to its REIT status. State tax expense, totaling $169,465, $369,018,
and $215,004 in 2002, 2001, and 2000, respectively, is included in property and other tax expense. At December 31, 2002, the Company had net operating loss carryforwards of approximately $1.2 million available for federal income tax purposes, which
begin to expire in 2005. As a result of the REIT election and change in ownership resulting from the Companys initial public offering in 1994, future utilization of the net operating loss carryforwards by the Company may be limited.



The Company declared and paid dividends on its Common Stock of
$.20, $.98 and $.98, per share in 2002, 2001 and 2000, respectively. Of these dividends, $.20, $.98 and $.63 per share represents return of capital in 2002, 2001 and 2000, respectively, and $.35 per share represents ordinary income in 2000.



As noted earlier, the Company disposed of four properties in
2002 and eleven properties during 2001. As a result of the dispositions, the Company realized built-in gains of $387,000 and $964,000 in 2002 and 2001, respectively. These built-in gains and the associated federal income taxes were not recognized in
2002 or 2001, but are deferred until the Company is in a net taxable income position, at which time the built-in gains will be offset by the net operating loss carryforward of $1.2 million.



Reconciliation between GAAP net income and taxable income (Unaudited)



The following table reconciles GAAP net income to taxable
income for the years ended December 31, 2002, 2001 and 2000:



|                                                                    |  | 2002 |             |   | 2001 |   |             | 2000 | 
|------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- | 
|GAAP net income (loss)                                              |  | $    | 735,968     |   |      | $ | (3,068,617  | )    | 
|Add book depreciation and amortization                              |  |      | 19,758,336  |   |      |   | 19,517,341  |      | 
|Less tax depreciation and amortization                              |  |      | (16,662,845 | ) |      |   | (18,313,646 | )    | 
|Book/tax difference on gains/losses from capital transactions       |  |      | 550,567     |   |      |   | (1,005,745  | )    | 
|Other book/tax differences, net                                     |  |      | 422,800     |   |      |   | 1,216,541   |      | 
|                                                                    |  |      |             |   |      |   |             |      | 
|Adjusted taxable income (loss) subject to 90% dividend requirements |  | $    | 4,804,826   |   |      | $ | (1,654,126  | )    | 
|                                                                    |  |      |             |   |      |   |             |      | 



Reconciliation
between Cash Dividends Paid and Dividends Paid Deduction (Unaudited)



The following table reconciles cash dividends paid with the dividends paid deduction:



|                                            |  | 2002 |            |   | 2001 |   |             | 2000 | 
|------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | ---- | 
|Cash dividends paid                         |  | $    | 9,011,716  |   |      | $ | 18,065,307  |      | 
|Less dividends designated return of capital |  |      | (3,207,057 | ) |      |   | (11,563,294 | )    | 
|Other                                       |  |      |           |   |      |   | (17,632     | )    | 
|                                            |  |      |            |   |      |   |             |      | 
|Dividends paid deduction                    |  | $    | 5,804,659  |   |      | $ | 6,484,381   |      | 
|                                            |  |      |            |   |      |   |             |      | 



F-20



---



Characterization of
distributions (Unaudited)



The following table characterizes
distributions paid per common and preferred share:



|                  |  | 2002 |           |   | 2001   |   |   | 2000 |           
|----------------- |  | ---- | --------- | - | ------ | - | - | ---- | ----------
|                  |  | $    |           | % |        |   | $ |      | %         
|Common Stock      |  |      |           |   |        |   |   |      |           
|Ordinary income   |  | $    |          |   |       |   |   | $    |          
|Return of capital |  |      | 2,343,275 |   | 100.00 | % |   |      | 11,396,576
|                  |  |      |           |   |        |   |   |      |           
|Total             |  | $    | 2,343,275 |   | 100.00 | % |   | $    | 11,396,576
|                  |  |      |           |   |        |   |   |      |           
|Preferred Stock   |  |      |           |   |        |   |   |      |           
|Ordinary income   |  |      | 5,804,659 |   | 87.00  | % |   | $    | 6,502,013 
|Return of capital |  |      | 863,782   |   | 13.00  | % |   |      | 166,718   
|                  |  |      |           |   |        |   |   |      |           
|Total             |  | $    | 6,668,441 |   | 100.00 | % |   | $    | 6,668,731 
|                  |  |      |           |   |        |   |   |      |           



|10. |  | Additional Related Party Transactions
|--- |  | -------------------------------------



KH identifies sites and constructs the Inns for the Company. The Company paid KH a total of $12,497,560, $29,116,981 and $61,082,972 for construction of
new Inns, Inn expansions, and renovations during the years ended December 31, 2002, 2001 and 2000, respectively.



The Company shares employees and office space with KH. Under the Cost Reimbursement Agreement, KH charged the Company approximately $1,574,000, $875,000 and $962,000 for its allocation of salary,
office overhead, and other general and administrative costs in 2002, 2001 and 2000, respectively. The Company expensed approximately $1,399,000, $806,000 and $564,000 of the allocated costs in 2002, 2001 and 2000, respectively. The remaining costs
represented capitalized expenditures.



The rent expense under the
office lease is paid by KH and is allocated under the Cost Reimbursement Agreement described in Note 10. The office lease requires future minimum payments as follows:



|2003       |  | $ | 160,667  
|---------- |  | - | ---------
|2004       |  |   | 167,093  
|2005       |  |   | 173,767  
|2006       |  |   | 180,688  
|2007       |  |   | 187,980  
|Thereafter |  |   | 398,824  
|           |  |   |          
|Total      |  | $ | 1,269,019
|           |  |   |          



F-21



---



|11. |  | Other Commitments and Contingencies
|--- |  | -----------------------------------



As of December 31, 2002, the Company had executed construction contracts with KH for an Inn expansion totaling $900,000, of which $264,000 had not been
expended.



The Company leases land underlying certain of its
operating Inns and land for each billboard location. Lease expense of $246,725, $232,862 and $245,900, in 2002, 2001 and 2000, respectively, is included in general and administrative expense in the Companys statements of operations. The ground
leases require future minimum payments as follows:



|2003       |  | $ | 211,636  
|---------- |  | - | ---------
|2004       |  |   | 211,669  
|2005       |  |   | 211,703  
|2006       |  |   | 154,696  
|2007       |  |   | 139,181  
|Thereafter |  |   | 3,981,211
|           |  |   |          
|Total      |  | $ | 4,910,096
|           |  |   |          



The Company is a
defendant or plaintiff in various legal actions which have arisen in the normal course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse affect on the Companys financial
position or results of operations.



|12. |  | Quarterly Results of Operations (Unaudited)
|--- |  | -------------------------------------------



The following is a summary of the quarterly results of operations for 2002 and 2001:



|                        |  | 2002 Quarters |           
|----------------------- |  | ------------- | ----------
|                        |  | First         |           
|Lease revenue           |  | $             | 9,695,142 
|Discontinued operations |  |               | 59,160    
|Net (loss) income       |  |               | (1,086,326
|Loss per common share:  |  |               |           
|Basic and diluted       |  |               | (.25      
|                       
|                        |  | 2001 Quarters |           
|                        |  | First         |           
|Lease revenue           |  | $             | 10,559,790
|Discontinued operations |  |               | 83,533    
|Net (loss) income       |  |               | (840,434  
|Loss per common share:  |  |               |           
|Basic and diluted       |  |               | (.23      



F-22



---

Jameson Inns, Inc.

Schedule IIIReal Estate and Accumulated Depreciation

As of December 31, 2002



|Property          |  | Mortgage Debt |           | Initial Cost                        |           | Cost Capitalization Subsequent to Acquisition |   | Gross Amount at Which Carried at Close of Period |                                     | Total |         | Accumulated Depreciation |                                     | Date Acquired |           | Date of Construction |   | Life on Which Depreciation in Latest Income Statement is Computed
|----------------- |  | ------------- | --------- | ----------------------------------- | --------- | --------------------------------------------- | - | ------------------------------------------------ | ----------------------------------- | ----- | ------- | ------------------------ | ----------------------------------- | ------------- | --------- | -------------------- | - | -----------------------------------------------------------------
|                  |  | Land          |           | Buildings, Equipment & Improvements |           | Land                                          |   |                                                  | Buildings, Equipment & Improvements |       | Land    |                          | Buildings, Equipment & Improvements |               |           |                      |   |                                                                  
|Alabama:          |  |               |           |                                     |           |                                               |   |                                                  |                                     |       |         |                          |                                     |               |           |                      |   |                                                                  
|Albertville       |  | $             | 1,231,054 |                                     | 174,000   |                                               | $ |                                                 |                                     | $     | 418     |                          |                                     | $             | 1,215,022 |                      | $ | 174,418                                                          
|Alexander City    |  |               | 1,513,659 |                                     | 160,086   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,884,938 |                      |   | 160,086                                                          
|Arab              |  |               | 1,094,270 |                                     | 131,554   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,183,884 |                      |   | 131,554                                                          
|Auburn            |  |               | 1,094,272 |                                     | 227,000   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,427,363 |                      |   | 227,000                                                          
|Bessemer          |  |               | 1,734,603 |                                     | 327,192   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 2,356,720 |                      |   | 327,192                                                          
|Decatur           |  |               | 1,488,379 |                                     | 201,629   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 2,187,414 |                      |   | 201,629                                                          
|Eufaula           |  |               | 992,732   |                                     | 228,869   |                                               |   |                                                 |                                     |       | 5,575   |                          |                                     |               | 1,336,092 |                      |   | 234,444                                                          
|Florence          |  |               | 1,731,959 |                                     | 313,579   |                                               |   |                                                 |                                     |       | 1,202   |                          |                                     |               | 2,023,017 |                      |   | 314,781                                                          
|Greenville        |  |               | 867,360   |                                     | 228,511   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,567,848 |                      |   | 228,511                                                          
|Jasper            |  |               | 1,453,600 |                                     | 225,633   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 2,183,398 |                      |   | 225,633                                                          
|Oxford            |  |               | 1,976,611 |                                     | 307,635   |                                               |   |                                                 |                                     |       | (340    | )                        |                                     |               | 2,492,022 |                      |   | 307,295                                                          
|Ozark             |  |               | 718,451   |                                     | 176,148   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,229,159 |                      |   | 176,148                                                          
|Prattville        |  |               | 1,551,235 |                                     | 319,736   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 2,329,762 |                      |   | 319,736                                                          
|Scottsboro        |  |               | 1,653,688 |                                     | 324,732   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 2,456,235 |                      |   | 324,732                                                          
|Selma             |  |               | 1,389,771 |                                     | 143,812   |                                               |   |                                                 |                                     |       | 22,773  |                          |                                     |               | 2,036,608 |                      |   | 166,585                                                          
|Sylacauga         |  |               | 1,796,355 |                                     | 224,476   |                                               |   |                                                 |                                     |       | (1      | )                        |                                     |               | 2,495,458 |                      |   | 224,476                                                          
|Trussville        |  |               | 1,384,946 |                                     | 425,438   |                                               |   |                                                 |                                     |       | 1,377   |                          |                                     |               | 2,467,280 |                      |   | 426,815                                                          
|Tuscaloosa        |  |               | 1,464,025 |                                     |          |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 2,517,132 |                      |   |                                                                 
|Florida:          |  |               |           |                                     |           |                                               |   |                                                  |                                     |       |         |                          |                                     |               |           |                      |   |                                                                  
|Crestview         |  |               | 1,801,698 |                                     | 471,426   |                                               |   |                                                 |                                     |       | 10      |                          |                                     |               | 3,118,879 |                      |   | 471,436                                                          
|Jacksonville      |  |               | 2,531,571 |                                     | 679,519   |                                               |   |                                                 |                                     |       | 1,448   |                          |                                     |               | 4,455,222 |                      |   | 680,967                                                          
|Lake City         |  |               | 1,707,389 |                                     | 391,456   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 3,121,546 |                      |   | 391,456                                                          
|Lakeland          |  |               | 2,138,248 |                                     | 618,636   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 3,773,359 |                      |   | 618,636                                                          
|Ormond Beach      |  |               | 2,079,505 |                                     | 497,099   |                                               |   |                                                 |                                     |       | 10,859  |                          |                                     |               | 3,773,621 |                      |   | 507,958                                                          
|Palm Bay          |  |               | 2,273,723 |                                     | 418,745   |                                               |   |                                                 |                                     |       | (11     | )                        |                                     |               | 3,762,116 |                      |   | 418,735                                                          
|Georgia:          |  |               |           |                                     |           |                                               |   |                                                  |                                     |       |         |                          |                                     |               |           |                      |   |                                                                  
|Albany            |  |               | 1,153,178 |                                     | 265,344   |                                               |   |                                                 |                                     |       | 92,308  |                          |                                     |               | 1,945,514 |                      |   | 357,652                                                          
|Americus          |  |               | 957,043   |                                     | 131,629   |                                               |   |                                                 |                                     |       | 72,297  |                          |                                     |               | 2,675,496 |                      |   | 203,926                                                          
|Bainbridge        |  |               | 1,236,074 |                                     | 125,000   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,769,260 |                      |   | 125,000                                                          
|Brunswick         |  |               | 1,501,525 |                                     | 175,275   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,923,709 |                      |   | 175,275                                                          
|Calhoun           |  |               | 1,404,172 |                                     | 113,722   |                                               |   |                                                 |                                     |       | 18,008  |                          |                                     |               | 1,828,789 |                      |   | 131,730                                                          
|Carrollton        |  |               | 2,024,532 |                                     | 225,000   |                                               |   |                                                 |                                     |       | 50,029  |                          |                                     |               | 1,826,058 |                      |   | 275,029                                                          
|Conyers           |  |               | 1,664,094 |                                     | 301,128   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 2,322,433 |                      |   | 301,128                                                          
|Dalton            |  |               | 1,639,654 |                                     | 546,257   |                                               |   |                                                 |                                     |       | 1,550   |                          |                                     |               | 2,302,389 |                      |   | 547,807                                                          
|Douglas           |  |               | 939,250   |                                     | 120,033   |                                               |   |                                                 |                                     |       | (1      | )                        |                                     |               | 1,254,270 |                      |   | 120,033                                                          
|Dublin            |  |               | 830,730   |                                     |          |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,496,626 |                      |   |                                                                 
|Eastman           |  |               | 615,596   |                                     | 87,883    |                                               |   |                                                 |                                     |       | 13,917  |                          |                                     |               | 1,533,625 |                      |   | 101,800                                                          
|Fitzgerald        |  |               | 841,262   |                                     | 133,515   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,203,445 |                      |   | 133,515                                                          
|Jesup             |  |               | 1,507,151 |                                     | 89,917    |                                               |   |                                                 |                                     |       | 14,239  |                          |                                     |               | 2,194,947 |                      |   | 104,156                                                          
|Kingsland         |  |               | 994,492   |                                     | 283,432   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,488,515 |                      |   | 283,432                                                          
|Lagrange          |  |               | 1,882,437 |                                     | 200,073   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 2,061,740 |                      |   | 200,073                                                          
|Newnan            |  |               | 2,096,543 |                                     | 529,377   |                                               |   |                                                 |                                     |       | 1,006   |                          |                                     |               | 3,802,716 |                      |   | 530,383                                                          
|Perry             |  |               | 1,045,267 |                                     | 238,325   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,446,494 |                      |   | 238,325                                                          
|Pooler            |  |               | 1,604,390 |                                     | 501,223   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 3,181,386 |                      |   | 501,223                                                          
|Rome              |  |               | 2,237,105 |                                     | 254,849   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 3,799,672 |                      |   | 254,849                                                          
|Thomaston         |  |               | 1,252,580 |                                     | 157,181   |                                               |   |                                                 |                                     |       | (50,110 | )                        |                                     |               | 2,176,768 |                      |   | 107,071                                                          
|Thomasville       |  |               | 1,061,853 |                                     | 331,161   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,572,926 |                      |   | 331,161                                                          
|Valdosta          |  |               | 1,407,946 |                                     | 166,632   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,848,124 |                      |   | 166,632                                                          
|Warner     Robins |  |               | 1,741,255 |                                     | 365,853   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 2,098,853 |                      |   | 365,853                                                          
|Waynesboro        |  |               | 950,723   |                                     | 142,501   |                                               |   |                                                 |                                     |       |        |                          |                                     |               | 1,359,352 |                      |   | 142,501                                                          
|Waycross          |  |               | 1,507,145 |                                     | 87,000    |                                               |   |                                                 |                                     |       | 13,777  |                          |                                     |               | 2,146,986 |                      |   | 100,777                                                          
|Illinois:         |  |               |           |                                     |           |                                               |   |                                                  |                                     |       |         |                          |                                     |               |           |                      |   |                                                                  
|Normal            |  |               | 4,410,899 |                                     | 1,076,916 |                                               |   | 5,163,743                                        |                                     |       |        |                          |                                     |               | 438,114   |                      |   | 1,076,916                                                        
|Peoria            |  |               | 3,809,413 |                                     | 817,523   |                                               |   | 4,886,124                                        |                                     |       |        |                          |                                     |               | 936,627   |                      |   | 817,523                                                          
|Springfield       |  |               | 1,804,459 |                                     |          |                                               |   | 1,494,985                                        |                                     |       |        |                          |                                     |               | 540,020   |                      |   |                                                                 



F-23



---



Jameson Inns, Inc.

Schedule IIIReal Estate and Accumulated Depreciation

As of December 31, 2002



|                 |  |               |  | Initial Cost |  | Cost Capitalization Subsequent to Acquisition |  | Gross Amount at Which Carried at Close of Period |   |  |                                     |  |         |  |                                     |  |           | Life on Which Depreciation in Latest Income Statement is Computed
|---------------- |  | ------------- |  | ------------ |  | --------------------------------------------- |  | ------------------------------------------------ | - |  | ----------------------------------- |  | ------- |  | ----------------------------------- |  | --------- | -----------------------------------------------------------------
|Property         |  | Mortgage Debt |  | Land         |  | Buildings, Equipment & Improvements           |  | Land                                             |   |  | Buildings, Equipment & Improvements |  | Land    |  | Buildings, Equipment & Improvements |  | Total     |                                                                  
|Indiana:         |  |               |  |              |  |                                               |  |                                                  |   |  |                                     |  |         |  |                                     |  |           |                                                                  
|Carmel           |  | 3,336,939     |  | 684,321      |  | 3,730,497                                     |  |                                                 |   |  | 183,445                             |  | 684,321 |  | 3,913,941                           |  | 4,598,263 |                                                                  
|Elkhart          |  | 3,030,000     |  | 637,753      |  | 5,834,950                                     |  |                                                 |   |  | 496,437                             |  | 637,753 |  | 6,331,387                           |  | 6,969,140 |                                                                  
|Evansville       |  | 2,748,376     |  | 359,102      |  | 2,880,265                                     |  |                                                 |   |  | 596,347                             |  | 359,102 |  | 3,476,613                           |  | 3,835,715 |                                                                  
|Fort Wayne       |  | 2,711,344     |  | 473,564      |  | 3,062,301                                     |  |                                                 |   |  | 558,723                             |  | 473,564 |  | 3,621,024                           |  | 4,094,588 |                                                                  
|Indy Castleton   |  | 2,835,249     |  | 584,039      |  | 5,241,877                                     |  |                                                 |   |  | 497,414                             |  | 584,039 |  | 5,739,291                           |  | 6,323,329 |                                                                  
|Indy East        |  | 2,496,822     |  | 400,007      |  | 2,479,422                                     |  |                                                 |   |  | 477,847                             |  | 400,007 |  | 2,957,269                           |  | 3,357,276 |                                                                  
|Indy Northwest   |  | 1,955,345     |  | 442,666      |  | 2,217,552                                     |  |                                                 |   |  | 1,015,444                           |  | 442,666 |  | 3,232,996                           |  | 3,675,662 |                                                                  
|Indy South       |  | 2,329,178     |  | 180,071      |  | 1,824,161                                     |  |                                                 |   |  | 657,912                             |  | 180,071 |  | 2,482,074                           |  | 2,662,144 |                                                                  
|Indy West        |  | 4,495,561     |  | 916,161      |  | 5,236,594                                     |  |                                                 |   |  | 521,613                             |  | 916,161 |  | 5,758,208                           |  | 6,674,369 |                                                                  
|Kokomo           |  | 2,748,375     |  | 527,376      |  | 3,720,270                                     |  | (5,843                                           | ) |  | 1,011,674                           |  | 521,533 |  | 4,731,944                           |  | 5,253,477 |                                                                  
|Lafayette        |  | 3,030,871     |  | 403,849      |  | 3,970,336                                     |  |                                                 |   |  | 763,238                             |  | 403,849 |  | 4,733,573                           |  | 5,137,423 |                                                                  
|Muncie           |  | 2,198,701     |  | 407,065      |  | 3,392,767                                     |  |                                                 |   |  | 450,072                             |  | 407,065 |  | 3,842,838                           |  | 4,249,903 |                                                                  
|South Bend       |  | 3,298,051     |  | 585,531      |  | 5,836,122                                     |  |                                                 |   |  | 748,575                             |  | 585,531 |  | 6,584,697                           |  | 7,170,228 |                                                                  
|Terre Haute      |  | 3,435,000     |  | 878,773      |  | 2,479,040                                     |  |                                                 |   |  |                                    |  | 878,773 |  | 2,479,040                           |  | 3,357,814 |                                                                  
|Iowa:            |  |               |  |              |  |                                               |  |                                                  |   |  |                                     |  |         |  |                                     |  |           |                                                                  
|Bettendorf       |  | 2,756,211     |  | 974,058      |  | 3,073,596                                     |  |                                                 |   |  | 289,487                             |  | 974,058 |  | 3,363,083                           |  | 4,337,141 |                                                                  
|Kentucky:        |  |               |  |              |  |                                               |  |                                                  |   |  |                                     |  |         |  |                                     |  |           |                                                                  
|Louisville East  |  | 4,897,927     |  | 585,491      |  | 6,973,653                                     |  |                                                 |   |  | 596,835                             |  | 585,491 |  | 7,570,488                           |  | 8,155,979 |                                                                  
|Louisville South |  | 2,340,000     |  | 644,870      |  | 6,509,901                                     |  |                                                 |   |  | 1,270,104                           |  | 644,870 |  | 7,780,005                           |  | 8,424,875 |                                                                  
|Richmond         |  | 2,121,617     |  | 607,095      |  |                                              |  | 2,858                                            |   |  | 3,986,512                           |  | 609,953 |  | 3,986,512                           |  | 4,596,465 |                                                                  
|Louisiana:       |  |               |  |              |  |                                               |  |                                                  |   |  |                                     |  |         |  |                                     |  |           |                                                                  
|Lafayette        |  | 2,758,363     |  | 433,291      |  |                                              |  | 204,546                                          |   |  | 4,693,929                           |  | 637,837 |  | 4,693,929                           |  | 5,331,766 |                                                                  
|Shreveport       |  | 2,259,113     |  | 531,041      |  |                                              |  | 8,409                                            |   |  | 3,993,422                           |  | 539,450 |  | 3,993,422                           |  | 4,532,872 |                                                                  
|West Monroe      |  | 2,625,000     |  | 495,209      |  |                                              |  |                                                 |   |  | 3,980,697                           |  | 495,209 |  | 3,980,697                           |  | 4,475,905 |                                                                  
|Mississippi:     |  |               |  |              |  |                                               |  |                                                  |   |  |                                     |  |         |  |                                     |  |           |                                                                  
|Grenada          |  | 1,018,749     |  | 350,000      |  |                                              |  | 2,217                                            |   |  | 1,616,291                           |  | 352,217 |  | 1,616,291                           |  | 1,968,508 |                                                                  
|Jackson          |  | 2,162,072     |  | 586,831      |  |                                              |  | 602                                              |   |  | 3,774,465                           |  | 587,433 |  | 3,774,465                           |  | 4,361,898 |                                                                  
|Meridian         |  | 1,643,453     |  | 419,856      |  |                                              |  | 2,648                                            |   |  | 2,433,022                           |  | 422,504 |  | 2,433,022                           |  | 2,855,526 |                                                                  
|Pearl            |  | 2,287,020     |  | 564,932      |  |                                              |  |                                                 |   |  | 3,766,609                           |  | 564,932 |  | 3,766,609                           |  | 4,331,541 |                                                                  
|Tupelo           |  | 1,382,634     |  | 427,924      |  |                                              |  | 1,360                                            |   |  | 2,342,289                           |  | 429,284 |  | 2,342,289                           |  | 2,771,573 |                                                                  
|Vicksburg        |  | 1,602,858     |  | 326,653      |  |                                              |  | 1,112                                            |   |  | 2,434,358                           |  | 327,765 |  | 2,434,358                           |  | 2,762,123 |                                                                  
|North Carolina:  |  |               |  |              |  |                                               |  |                                                  |   |  |                                     |  |         |  |                                     |  |           |                                                                  
|Dunn             |  | 1,079,347     |  | 202,052      |  |                                              |  |                                                 |   |  | 1,556,499                           |  | 202,052 |  | 1,556,499                           |  | 1,758,551 |                                                                  
|Eden             |  | 1,006,119     |  | 197,468      |  |                                              |  | 26                                               |   |  | 1,563,361                           |  | 197,494 |  | 1,563,361                           |  | 1,760,855 |                                                                  
|Forest City      |  | 1,540,216     |  | 187,294      |  |                                              |  | 2,950                                            |   |  | 2,032,474                           |  | 190,244 |  | 2,032,474                           |  | 2,222,719 |                                                                  
|Goldsboro        |  | 2,022,049     |  | 397,096      |  |                                              |  | (5,102                                           | ) |  | 3,766,529                           |  | 391,994 |  | 3,766,529                           |  | 4,158,523 |                                                                  
|Greenville       |  | 1,055,765     |  | 310,006      |  |                                              |  |                                                 |   |  | 1,544,211                           |  | 310,006 |  | 1,544,211                           |  | 1,854,217 |                                                                  
|Henderson        |  | 2,068,487     |  | 478,688      |  |                                              |  |                                                 |   |  | 3,771,908                           |  | 478,688 |  | 3,771,908                           |  | 4,250,596 |                                                                  
|Hickory          |  | 1,629,301     |  | 412,322      |  |                                              |  |                                                 |   |  | 2,410,891                           |  | 412,322 |  | 2,410,891                           |  | 2,823,213 |                                                                  
|Laurinburg       |  | 978,849       |  | 225,441      |  |                                              |  | (181,525                                         | ) |  | 1,335,127                           |  | 43,916  |  | 1,335,127                           |  | 1,379,043 |                                                                  
|Lenoir           |  | 942,308       |  | 360,923      |  |                                              |  | 1,605                                            |   |  | 1,455,999                           |  | 362,528 |  | 1,455,999                           |  | 1,818,527 |                                                                  
|Roanoke Rapids   |  | 1,005,956     |  | 320,014      |  |                                              |  | (4,812                                           | ) |  | 1,538,868                           |  | 315,202 |  | 1,538,868                           |  | 1,854,070 |                                                                  
|Sanford          |  | 978,849       |  | 227,030      |  |                                              |  | 32,171                                           |   |  | 1,511,824                           |  | 259,201 |  | 1,511,824                           |  | 1,771,024 |                                                                  
|Smithfield       |  | 987,280       |  | 246,092      |  |                                              |  |                                                 |   |  | 1,605,625                           |  | 246,092 |  | 1,605,625                           |  | 1,851,717 |                                                                  
|Wilson           |  | 854,577       |  | 237,712      |  |                                              |  | 20                                               |   |  | 1,593,500                           |  | 237,732 |  | 1,593,500                           |  | 1,831,232 |                                                                  
|Wilmington       |  | 2,182,365     |  | 685,078      |  |                                              |  | (87                                              | ) |  | 4,003,207                           |  | 684,991 |  | 4,003,207                           |  | 4,688,198 |                                                                  
|Ohio:            |  |               |  |              |  |                                               |  |                                                  |   |  |                                     |  |         |  |                                     |  |           |                                                                  
|Cincy North      |  | 2,121,238     |  | 521,588      |  | 2,220,586                                     |  |                                                 |   |  | 283,244                             |  | 521,588 |  | 2,503,830                           |  | 3,025,418 |                                                                  
|Columbus         |  | 3,507,548     |  | 782,254      |  | 3,905,175                                     |  |                                                 |   |  | 747,819                             |  | 782,254 |  | 4,652,994                           |  | 5,435,248 |                                                                  
|Dayton           |  | 1,955,345     |  | 625,511      |  | 3,388,780                                     |  |                                                 |   |  | 557,987                             |  | 625,511 |  | 3,946,767                           |  | 4,572,279 |                                                                  
|South Carolina:  |  |               |  |              |  |                                               |  |                                                  |   |  |                                     |  |         |  |                                     |  |           |                                                                  
|Anderson         |  | 1,079,225     |  | 201,000      |  |                                              |  | 133,385                                          |   |  | 2,273,715                           |  | 334,385 |  | 2,273,715                           |  | 2,608,100 |                                                                  
|Cheraw           |  | 1,591,164     |  | 168,458      |  |                                              |  | (49,316                                          | ) |  | 1,984,878                           |  | 119,142 |  | 1,984,878                           |  | 2,104,021 |                                                                  
|Duncan           |  | 974,419       |  | 212,246      |  |                                              |  |                                                 |   |  | 1,545,061                           |  | 212,246 |  | 1,545,061                           |  | 1,757,307 |                                                                  
|Easley           |  | 1,558,796     |  | 266,753      |  |                                              |  | 2,710                                            |   |  | 1,959,834                           |  | 269,463 |  | 1,959,834                           |  | 2,229,297 |                                                                  
|Gaffney          |  | 1,832,969     |  | 135,025      |  |                                              |  |                                                 |   |  | 1,745,774                           |  | 135,025 |  | 1,745,774                           |  | 1,880,798 |                                                                  
|Georgetown       |  | 1,884,503     |  | 144,353      |  |                                              |  |                                                 |   |  | 2,535,429                           |  | 144,353 |  | 2,535,429                           |  | 2,679,783 |                                                                  



F-24



---

Jameson Inns, Inc.

Schedule IIIReal Estate and Accumulated Depreciation

As of December 31, 2002



|Property                             |  | Mortgage Debt |             | Initial Cost                        |   | Cost Capitalization Subsequent to Acquisition |  | Gross Amount at Which Carried at Close of Period |                                     | Total |      | Accumulated Depreciation |                                     | Date Acquired |   | Date of Construction |  | Life on Which Depreciation in Latest Income Statement is
Computed
|------------------------------------ |  | ------------- | ----------- | ----------------------------------- | - | --------------------------------------------- |  | ------------------------------------------------ | ----------------------------------- | ----- | ---- | ------------------------ | ----------------------------------- | ------------- | - | -------------------- |  | -----------------------------------------------------------------
|                                     |  | Land          |             | Buildings, Equipment & Improvements |   | Land                                          |  |                                                  | Buildings, Equipment & Improvements |       | Land |                          | Buildings, Equipment & Improvements |               |   |                      |  |                                                                  
|Greenwood                            |  |               | 1,824,465   |                                     |   | 140,231                                       |  |                                                  |                                    |       |      | 20,741                   |                                     |               |   | 1,889,136            |  |                                                                  
|Lancaster                            |  |               | 1,970,630   |                                     |   | 150,592                                       |  |                                                  |                                    |       |      |                         |                                     |               |   | 2,276,141            |  |                                                                  
|Orangeburg                           |  |               | 2,024,295   |                                     |   | 165,010                                       |  |                                                  |                                    |       |      | 585                      |                                     |               |   | 2,105,193            |  |                                                                  
|Seneca                               |  |               | 2,022,665   |                                     |   | 204,385                                       |  |                                                  |                                    |       |      |                         |                                     |               |   | 2,324,310            |  |                                                                  
|Tennessee:                           |  |               |             |                                     |   |                                               |  |                                                  |                                     |       |      |                          |                                     |               |   |                      |  |                                                                  
|Alcoa                                |  |               | 2,038,063   |                                     |   | 427,803                                       |  |                                                  |                                    |       |      |                         |                                     |               |   | 4,005,810            |  |                                                                  
|Cleveland                            |  |               | 1,661,744   |                                     |   | 384,688                                       |  |                                                  |                                    |       |      | 4,343                    |                                     |               |   | 2,301,174            |  |                                                                  
|Columbia                             |  |               | 1,864,402   |                                     |   | 483,568                                       |  |                                                  |                                    |       |      | 7,389                    |                                     |               |   | 3,098,278            |  |                                                                  
|Decherd                              |  |               | 1,193,941   |                                     |   | 254,501                                       |  |                                                  |                                    |       |      | 191                      |                                     |               |   | 1,402,506            |  |                                                                  
|Gallatin                             |  |               | 1,552,655   |                                     |   | 405,738                                       |  |                                                  |                                    |       |      |                         |                                     |               |   | 2,319,194            |  |                                                                  
|Greeneville                          |  |               | 1,595,062   |                                     |   | 406,052                                       |  |                                                  |                                    |       |      | (274,709                 | )                                   |               |   | 3,124,972            |  |                                                                  
|Jackson                              |  |               | 2,048,750   |                                     |   | 467,741                                       |  |                                                  |                                    |       |      | 141                      |                                     |               |   | 3,778,248            |  |                                                                  
|Johnson City                         |  |               | 1,731,959   |                                     |   | 405,939                                       |  |                                                  |                                    |       |      | 89                       |                                     |               |   | 2,236,452            |  |                                                                  
|Kingsport                            |  |               | 1,744,204   |                                     |   | 425,481                                       |  |                                                  |                                    |       |      |                         |                                     |               |   | 3,092,478            |  |                                                                  
|Knoxville                            |  |               | 1,872,260   |                                     |   | 572,026                                       |  |                                                  | 3,347,959                           |       |      |                         |                                     |               |   | 324,130              |  |                                                                  
|Oakridge                             |  |               | 2,688,587   |                                     |   | 451,037                                       |  |                                                  |                                    |       |      | 8                        |                                     |               |   | 4,434,601            |  |                                                                  
|Tullahoma                            |  |               | 1,193,940   |                                     |   | 303,536                                       |  |                                                  |                                    |       |      | (149,730                 | )                                   |               |   | 1,363,433            |  |                                                                  
|Virginia:                            |  |               |             |                                     |   |                                               |  |                                                  |                                     |       |      |                          |                                     |               |   |                      |  |                                                                  
|Harrisonburg                         |  |               | 2,103,738   |                                     |   | 435,000                                       |  |                                                  |                                    |       |      | (700                     | )                                   |               |   | 3,789,343            |  |                                                                  
|Martinsville                         |  |               | 1,752,620   |                                     |   | 411,496                                       |  |                                                  |                                    |       |      | 3,100                    |                                     |               |   | 3,127,826            |  |                                                                  
|Construction in progress:            |  |               |             |                                     |   |                                               |  |                                                  |                                     |       |      |                         |                                     |               |   |                      |  |                                                                  
|Tullahoma, TN expansion              |  |               | 488,940     |                                     |   |                                              |  |                                                  |                                    |       |      |                         |                                     |               |   |                     |  |                                                                  
|Billboards and other                 |  |               | 6,138       |                                     |   |                                              |  |                                                  | 2,381,012                           |       |      |                         |                                     |               |   |                     |  |                                                                  
|                                     |  |               |             |                                     |   |                                               |  |                                                  |                                     |       |      |                          |                                     |               |   |                      |  |                                                                  
|Operating property and equipment     |  |               | 220,510,439 |                                     |   | 43,150,420                                    |  |                                                  | 95,251,669                          |       |      | 31,711                   |                                     |               |   | 244,042,698          |  |                                                                  
|Property and equipment held for sale |  |               | 2,310,000   |                                     |   | 524,289                                       |  |                                                  | 2,293,556                           |       |      | 102,196                  |                                     |               |   | 109,616              |  |                                                                  
|                                     |  |               |             |                                     |   |                                               |  |                                                  |                                     |       |      |                          |                                     |               |   |                      |  |                                                                  
|Totals                               |  | $             | 222,820,439 |                                     | $ | 43,674,709                                    |  | $                                                | 97,545,225                          |       | $    | 133,908                  |                                     |               | $ | 244,152,314          |  | $                                                                
|                                     |  |               |             |                                     |   |                                               |  |                                                  |                                     |       |      |                          |                                     |               |   |                      |  |                                                                  



F-25



---



Jameson Inns,
Inc.

Notes to Schedule III



|    |  |                                            |  | 2002 |             |   | 2001 |   |             | 2000 | 
|--- |  | ------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | ---- | 
|(a) |  | Reconciliation of real estate              |  |      |             |   |      |   |             |      | 
|    |  | Balance at beginning of year               |  | $    | 382,673,457 |   |      | $ | 371,489,258 |      | 
|    |  | Improvements                               |  |      | 12,541,184  |   |      |   | 30,541,256  |      | 
|    |  | Sale of Inns                               |  |      | (8,670,479  | ) |      |   | (19,357,057 | )    | 
|    |  |                                            |  |      |             |   |      |   |             |      | 
|    |  | Balance at end of year                     |  | $    | 386,544,162 |   |      | $ | 382,673,457 |      | 
|    |  |                                            |  |      |             |   |      |   |             |      | 
|   
|    |  |                                            |  |      |             |   |      |   |             |      | 
|(b) |  | Reconciliation of accumulated depreciation |  |      |             |   |      |   |             |      | 
|    |  | Balance at beginning of year               |  | $    | 54,325,854  |   |      | $ | 38,983,651  |      | 
|    |  | Depreciation expense                       |  |      | 19,758,336  |   |      |   | 19,517,341  |      | 
|    |  | Sale of Inns                               |  |      | (2,722,909  | ) |      |   | (4,175,138  | )    | 
|    |  |                                            |  |      |             |   |      |   |             |      | 
|    |  | Balance at end of year                     |  | $    | 71,361,281  |   |      | $ | 54,325,854  |      | 
|    |  |                                            |  |      |             |   |      |   |             |      | 



|(c) |  | The aggregate cost of the land, buildings, and furniture, fixtures and equipment for federal income tax purposes approximates the book basis.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | Depreciation for 1992 and prior additions is computed based on the following useful lives:
|--- |  | ------------------------------------------------------------------------------------------



|Buildings                         |  | 31.5 |  | years |  | 
|--------------------------------- |  | ---- |  | ----- |  | 
|                                 
|Land Improvements                 |  | 15   |  | years |  | 
|                                 
|Furniture, fixtures and
equipment |  | 5    |  | years |  | 



|(e) |  | Depreciation for 1993 and later additions is computed based on the following useful lives:
|--- |  | ------------------------------------------------------------------------------------------



|Buildings                         |  | 39    |  | years |  | 
|--------------------------------- |  | ----- |  | ----- |  | 
|                                 
|Land Improvements                 |  | 15    |  | years |  | 
|                                 
|Furniture, fixtures and
equipment |  | 3  5 |  | years |  | 
|                                 
|Billboards                        |  | 10    |  | years |  | 



F-26



---



Report of
Independent Auditors



The
Members

Kitchin Hospitality, LLC



We have audited the accompanying consolidated balance sheets of Kitchin Hospitality, LLC as of December 31, 2002 and 2001,
and the related consolidated statements of income and comprehensive income, members capital (deficit) and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



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



In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial position of Kitchin Hospitality, LLC at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.



/s/    Ernst & Young LLP



Atlanta, Georgia

February 25, 2003



F-27



---



Kitchin
Hospitality, LLC

Consolidated Balance Sheets



|                                                                     |  | December 31, |          
|-------------------------------------------------------------------- |  | ------------ | ---------
|                                                                     |  | 2002         |          
|Assets                                                               |  |              |          
|Current assets:                                                      |  |              |          
|Cash                                                                 |  | $            | 284,522  
|Marketable securities                                                |  |              | 1,243,029
|Hotel accounts receivable, net of allowance of $63,613 and $57,592   |  |              | 1,682,631
|Construction contract and other receivables                          |  |              | 1,531,974
|Costs and estimated earnings in excess of billings                   |  |              | 1,120,681
|Predevelopment costs                                                 |  |              | 257,457  
|Prepaid expenses and other assets                                    |  |              | 757,260  
|Inventory                                                            |  |              | 1,428,735
|                                                                     |  |              |          
|                                                                     |  |              | 8,306,289
|Property and equipment, net                                          |  |              | 467,089  
|Intangibles, net                                                     |  |              | 289,865  
|Deferred finance costs, net                                          |  |              | 10,833   
|                                                                     |  |              |          
|                                                                     |  | $            | 9,074,076
|                                                                     |  |              |          
|Liabilities and Members
Capital                                     |  |              |          
|Current liabilities:                                                 |  |              |          
|Subcontractors payable, including retainage of $462,626 and $396,128 |  | $            | 2,516,549
|Accounts payable                                                     |  |              | 361,147  
|Payable to affiliates                                                |  |              | 1,484,085
|Notes payable, current portion                                       |  |              | 750,000  
|Sales and use taxes payable                                          |  |              | 726,783  
|Accrued payroll                                                      |  |              | 814,426  
|Other accrued liabilities                                            |  |              | 1,545,200
|                                                                     |  |              |          
|                                                                     |  |              | 8,198,190
|Deferred gain on sale of asset                                       |  |              | 244,718  
|Notes payable, long-term portion                                     |  |              |         
|                                                                     |  |              |          
|Total liabilities                                                    |  |              | 8,442,908
|Retained earnings                                                    |  |              | 815,053  
|Unrealized loss on marketable securities                             |  |              | (183,885 
|                                                                     |  |              |          
|Members capital                                                     |  |              | 631,168  
|                                                                     |  |              |          
|                                                                     |  | $            | 9,074,076
|                                                                     |  |              |          



See
accompanying notes.



F-28



---



Kitchin
Hospitality, LLC

Consolidated Statements of Income and Comprehensive Income



|                                         |  | Year ended December 31, |            
|---------------------------------------- |  | ----------------------- | -----------
|                                         |  | 2002                    |            
|Revenues:                                |  |                         |            
|Room rental revenues                     |  | $                       | 88,480,760 
|Other inn-related sales                  |  |                         | 4,659,955  
|                                         |  |                         |            
|Hotel revenues                           |  |                         | 93,140,715 
|Construction revenues                    |  |                         | 23,999,448 
|Overhead reimbursement income            |  |                         | 1,592,650  
|Management and license fee income        |  |                         | 384,671    
|Gain on sale of assets, net              |  |                         | 298,152    
|Investment income (expense), net         |  |                         | 182,505    
|                                         |  |                         |            
|Total revenues                           |  |                         | 119,598,141
|Expenses:                                |  |                         |            
|Lease expense                            |  |                         | 41,329,634 
|Cost of construction revenues            |  |                         | 19,957,580 
|Room expenses                            |  |                         | 23,770,158 
|Utilities                                |  |                         | 5,559,355  
|General and administrative               |  |                         | 18,568,986 
|Maintenance                              |  |                         | 4,321,497  
|Advertising                              |  |                         | 4,504,234  
|Depreciation and amortization            |  |                         | 296,627    
|                                         |  |                         |            
|Total expenses                           |  |                         | 118,308,071
|Income from continuing operations        |  |                         | 1,290,070  
|Loss from discontinued operations        |  |                         | (393,145   
|                                         |  |                         |            
|Net income                               |  |                         | 896,925    
|Unrealized gain on marketable Securities |  |                         | 106,567    
|                                         |  |                         |            
|Comprehensive income                     |  | $                       | 1,003,492  
|                                         |  |                         |            



See
accompanying notes.



F-29



---



Kitchin
Hospitality, LLC

Consolidated Statements of Members Capital (Deficit)



|                                         |  | Members Capital (Deficit) |           
|---------------------------------------- |  | -------------------------- | ----------
|Balance at December 31, 1999             |  | $                          | (155,231  
|Distributions                            |  |                            | (392,505  
|Net income                               |  |                            | 593,026   
|Unrealized gain on marketable securities |  |                            | 175,280   
|                                         |  |                            |           
|Balance at December 31, 2000             |  |                            | 220,570   
|Distributions                            |  |                            | (1,506,046
|Net income                               |  |                            | 1,449,865 
|Unrealized gain on marketable securities |  |                            | 22,580    
|                                         |  |                            |           
|Balance at December 31, 2001             |  |                            | 186,969   
|Distributions                            |  |                            | (559,293  
|Net income                               |  |                            | 896,925   
|Unrealized gain on marketable securities |  |                            | 106,567   
|                                         |  |                            |           
|Balance at December 31, 2002             |  | $                          | 631,168   
|                                         |  |                            |           



See
accompanying notes.



F-30



---



Kitchin
Hospitality, LLC

Consolidated Statements of Cash Flows



|                                                                                                                   |  | Year ended December 31, |           
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ----------
|                                                                                                                   |  | 2002                    |           
|Operating activities                                                                                               |  |                         |           
|Net income from continuing operations                                                                              |  | $                       | 1,290,070 
|Adjustments to reconcile net income from continuing operations to cash (used in)
provided by operating activities: |  |                         |           
|Depreciation and amortization                                                                                      |  |                         | 296,627   
|Discontinued operations                                                                                            |  |                         | (393,145  
|Gain on sale of assets                                                                                             |  |                         | (298,152  
|Changes in assets and liabilities increasing (decreasing) cash:                                                    |  |                         |           
|Accounts receivable                                                                                                |  |                         | (319,653  
|Costs and estimated earnings in excess of billings                                                                 |  |                         | (1,120,681
|Receivable from (payable to) affiliates                                                                            |  |                         | 1,479,702 
|Predevelopment costs                                                                                               |  |                         | (45,104   
|Prepaid expenses and other assets                                                                                  |  |                         | (185,826  
|Inventory                                                                                                          |  |                         | 23,378    
|Subcontractors payable                                                                                             |  |                         | 409,109   
|Accounts payable                                                                                                   |  |                         | (82,102   
|Accrued payroll and other                                                                                          |  |                         | (1,549,150
|                                                                                                                   |  |                         |           
|Net cash (used in) provided by operating activities                                                                |  |                         | (494,927  
|Investing activities                                                                                               |  |                         |           
|Additions to property and equipment                                                                                |  |                         | (129,415  
|                                                                                                                   |  |                         |           
|Net cash used in investing activities                                                                              |  |                         | (129,415  
|Financing activities                                                                                               |  |                         |           
|Distributions to members                                                                                           |  |                         | (559,293  
|Proceeds from notes payable                                                                                        |  |                         | 750,000   
|Payments on notes payable                                                                                          |  |                         | (318,560  
|                                                                                                                   |  |                         |           
|Net cash used in financing activities                                                                              |  |                         | (127,853  
|Net change in cash                                                                                                 |  |                         | (752,195  
|Cash at beginning of year                                                                                          |  |                         | 1,036,717 
|                                                                                                                   |  |                         |           
|Cash at end of year                                                                                                |  | $                       | 284,522   
|                                                                                                                   |  |                         |           
|Supplemental information                                                                                           |  |                         |           
|Interest paid                                                                                                      |  | $                       | 4,396     
|Non-cash activity                                                                                                  |  |                         |           
|Unrealized gain on marketable securities                                                                           |  | $                       | 106,567   
|Non-cash distribution to reduce affiliate receivable                                                               |  | $                       |          



See
accompanying notes.



F-31



---

Kitchin Hospitality, LLC

Notes to Consolidated Financial Statements

December 31,
2002



|1. |  | Business and Basis of Financial Statements
|-- |  | ------------------------------------------



Kitchin Hospitality, LLC (the Company) primarily leases and operates inns owned by Jameson Inns, Inc. (the REIT). Jameson Inns,
Inc. is a real estate investment trust which owns the Jameson Inn and Signature Inn properties (the Inns). Thomas W. Kitchin is the Chairman and CEO of Jameson Inns, Inc. and of the Company.



Intercompany transactions among the entities and the divisions included in the
consolidated financial statements have been eliminated. The Company and its divisions perform the following activities:



| |  |  | The Hotel division leases the Inns from the REIT (see Note 3) and operates the Inns in all respects including staffing, advertising, housekeeping, and routine
maintenance. The Company is the exclusive lessee of Jameson Inns and Signature Inns. At December 31, 2002, the Company leased 121 Inns (8,281 rooms). The Company also has a contract with Jameson Inns, Inc. to execute the capital budgets for a fee
for these Inns.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Construction division historically developed and expanded Inns for the REIT, including identification of suitable Inn locations, design and configuration, land
preparation, construction, acquisition of initial furniture, fixtures and equipment. The Construction division also acts as the general contractor for various unrelated commercial developers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The members have no liability for any debt, obligations, or liabilities of
the Company (beyond his or her respective contributions) or for the acts of omission of any other member, agent or employee of the Company, except as provided for by section 14-11-408 of the Georgia Securities Act of 1973, as amended.



|2. |  | Summary of Significant Accounting Policies
|-- |  | ------------------------------------------



Use of 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.



F-32



---

Reclassifications



Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 presentation.



Marketable Securities



The Company considers all of its marketable securities as available for sale
and hence records them at fair value with changes in unrealized gains or losses being recorded directly to members capital (deficit). Fair value is based on the closing price of the securities on the last day of trading in the year. These
marketable securities consist of 72,727 shares of the REITs Series A Preferred Stock from the sale of the billboards in April of 1999.



Revenue Recognition



Hotels



For Inns operated by the Company hotel revenues and other fees are recognized when rooms are occupied and services are rendered.



Construction Contracts



Billings and costs applicable to construction contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred
to date compared to estimated total cost for each contract. Revisions to estimated contract profits or losses are made in the year in which circumstances requiring such revisions become known. Any anticipated losses on construction contracts are
charged to operations as soon as such losses can be estimated.



Predevelopment Costs



The Company
capitalizes direct costs related to specific future projects when they are deemed probable. When the project is no longer deemed probably, the capitalized direct costs are expensed to operations, or the costs are transferred to the project when
construction begins.



Inventory



Inventory, consisting of room linens and towels, is stated at the lower of
cost (first-in, first-out method) or market. Replacements of inventory are expensed.



F-33



---



Property and Equipment



Property and equipment is stated at cost.



Depreciation is calculated using the straight-line method over five years for
vehicles, and over three to seven years for office furniture, fixtures and equipment. Leasehold improvements at the Inns are amortized using the straight-line method over their estimated useful lives ranging from three to ten years, not to exceed
the remaining term of the lease (see Note 3), and the corporate office leasehold improvements are being amortized over the life of the lease.



The Companys long-lived assets are individually evaluated for impairment when conditions exist that indicate that it is probable that the sum of the
related expected future cash flows (on an undiscounted basis) are less than the historical net cost basis. Upon determination that a permanent impairment has occurred, the related assets are reduced to their fair value. There were no impairment
losses recorded for the periods presented.



Intangibles



Intangibles consist of:



|                         |  | 2002 |         |   | 2001 |  
|------------------------ |  | ---- | ------- | - | ---- | -
|Goodwill                 |  | $    | 203,862 |   |      | $
|Registered trademarks    |  |      | 129,807 |   |      |  
|                         |  |      |         |   |      |  
|                         |  |      | 333,669 |   |      |  
|Accumulated amortization |  |      | (43,804 | ) |      |  
|                         |  |      |         |   |      |  
|                         |  | $    | 289,865 |   |      | $
|                         |  |      |         |   |      |  



The registered
trademarks are related to operating the Inns. The lease described in Note 3 requires the Company to operate the Inns using the trademarks and not to use the trademarks (or license its use to any other parties) for the operation of lodging facilities
other than the Inns unless the REIT does not object to such unrelated use. The REIT has an option to purchase these trademarks from the Company at the end of the lease term (or upon the earlier termination of the lease with respect to all of the
Inns) for $25,000 and $50,000, respectively. The registered trademarks are being amortized over 20 years.



Income Taxes



Kitchin Hospitality, LLC has elected to be treated as a partnership for federal and state income tax purposes. Accordingly, the members report their proportionate share of the Companys taxable income or loss in their respective
tax returns; therefore, no provision for income taxes has been included in the accompanying financial statements.



F-34



---



Advertising



The Company expenses advertising as incurred.



Recent Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
Business Combinations (SFAS No. 141), which eliminates the pooling method of accounting for all business combinations initiated after June 30, 2001, and addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in business combinations initiated after June 30, 2001. The Company adopted SFAS No. 141 for business combinations initiated after June 30, 2001.



In June 2001, the Financial Accounting Standards Board issued SFAS No. 142 Goodwill and Other Intangible Assets
(SFAS No. 142). Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. The Company adopted the standard on January 1, 2002.



In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. See Note 7
for a discussion of the effect of SFAS No. 144 on the Companys financial statements.



In December 2001, the FASB Emerging Issues Task Force (EITF) issued EITF 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred (EITF 01-14). The Company adopted EITF 01-14 on January 1, 2002. EITF 01-14 requires companies that provide services as part of their central ongoing operations to characterize the reimbursement of out-of-pocket expenses
related to those services as revenue. In prior year periods, reimbursed expenses were recorded as a reduction to expense. In accordance with EITF 01-14, the Company reclassified $2.0 million of reimbursed expenses in 2001 from expense to revenue.



|3. |  | Leases
|-- |  | ------



In January 1994, the Company entered into a master lease (the Lease) with the REIT whereby all of the operating Inns are leased to the Company under the Lease and future Inns constructed by
the REIT during the term of the Lease will be added to the lease upon completion of each such Inns construction.



The Jameson and Signature leases, which expire December 31, 2011 and December 31, 2012, respectively, provide for payment of Base Rent plus Percentage
Rent. Base Rent, which is payable monthly, equals $264 and $394 per month for the Jameson Inns and Signature Inns, respectively, for each available room in the Inns at the beginning of the relevant month.



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Percentage Rent, which is
payable quarterly, is calculated as a percentage of the total amount of room rental and certain other miscellaneous revenues realized by the Company over the relevant period less base rent paid for such period. For Jameson Inns, the percentage is
39% of such revenues up to $23.01 per day per room in 2002 plus 65% of all additional average daily room rental revenues. For Signature Inns, the percentage is 37% of such revenues up to $38.61 per day per room in 2002 plus 65% of the next $10.00 of
average daily per room rental revenues; plus 70% of all additional average daily room rental revenues.



Total rent for the Jameson Inns for any calendar year may not exceed 47% of total room rental revenues Jameson Inns for that year. The $23.01 and $38.61 per room amount, for Jameson Inns and Signature
Inns, respectively, used in calculating percentage rent is subject to adjustment each year based on changes in the Consumer Price Index and as of January 1, 2003 was adjusted to $23.57 and $39.55 for Jameson Inns and Signature Inns, respectively.



Base rent totaled $30,980,783, $31,279,152 and $28,900,248 in
2002, 2001 and 2000, respectively. Percentage rent totaled $11,087,135, $11,597,800, and $13,651,822 in 2002, 2001 and 2000, respectively.



Under the Leases, the REIT is required to maintain the structural elements of each Inn. The Company is required, at its expense, to maintain the Inns
(exclusive of furniture, fixtures and equipment) in good order and to make nonstructural repairs which may be necessary and which do not significantly alter the character or purpose, or significantly detract from the value or operating efficiencies
of the Inns. All alterations, replacements and improvements are subject to all the terms and provisions of the Lease and become the property of the REIT upon termination of the Leases.



|4. |  | Property and Equipment
|-- |  | ----------------------



Property and equipment consists of the following at December 31:



|                                  |  | 2002 |            |   | 2001 |  
|--------------------------------- |  | ---- | ---------- | - | ---- | -
|Furniture, fixtures and equipment |  | $    | 1,622,508  |   |      | $
|Leasehold improvements            |  |      | 366,284    |   |      |  
|                                  |  |      |            |   |      |  
|                                  |  |      | 1,988,792  |   |      |  
|Accumulated depreciation          |  |      | (1,521,703 | ) |      |  
|                                  |  |      |            |   |      |  
|                                  |  | $    | 467,089    |   |      | $
|                                  |  |      |            |   |      |  



On April 2, 1999, the
Company completed the sale of the outdoor advertising assets and certain operations of the Company to the REIT. Consideration of $2,381,000 paid to the Company from the REIT consisted of (i) 72,727 shares of the REITs Series A Preferred Stock
(at $17.625 per share), (ii) $400,000 in cash, and (iii) the assumption of indebtedness of approximately $700,000. The gain of $1,163,098 is being recognized over the lease period and $212,892 was recognized in each of the three years ended December
31, 2002, 2001, and 2000 respectively.



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|5. |  | Construction Contracts
|-- |  | ----------------------



Construction contracts consist of the following at December 31:



|                                                   |  | 2002 |             |   | 2001 |  
|-------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Costs incurred on contracts                        |  | $    | 19,957,580  |   |      | $
|Estimated earnings                                 |  |      | 4,041,868   |   |      |  
|                                                   |  |      |             |   |      |  
|Contract revenues earned                           |  |      | 23,999,448  |   |      |  
|Less: billings                                     |  |      | (22,878,767 | ) |      |  
|                                                   |  |      |             |   |      |  
|Costs and estimated earnings in excess of billings |  | $    | 1,120,681   |   |      | $
|                                                   |  |      |             |   |      |  



At December 31, 2001,
the Billings in Excess of Costs and Estimated Earnings are included in other accrued liabilities.



The Company records income on construction contracts on the percentage-of-completion basis. Revisions to estimated contract profits are made in the year in which circumstances requiring such revisions
become known. The effect of changes in the estimates of contract gross margins changed net income for the years ended December 31, 2002, 2001, and 2000 by an increase of approximately $155,000, $804,000, and $576,000, respectively.



|6. |  | Notes Payable
|-- |  | -------------



Notes payable consist of the following at December 31:



|                                                                                                                                                                                                                                                                                                        |  | 2002 |          |   | 2001 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -
|$2.0 million line of credit, maturing on October 15, 2003, interest only installments
due monthly until maturity. Interest accrues at the rate of prime plus 0.75% (5.0% at December 31, 2002). This loan is secured by hotel and construction receivables and is guaranteed by the CEO of the Company. |  | $    | 750,000  |   |      | $
|Mortgage note payable, maturing October 2017, due in monthly installments of $2,873 of
principal and interest with remaining unpaid balance payable at maturity. Interest accrues at prime plus 1.25% (6.0% at December 2001). This loan was paid in full during 2002.                                  |  |      |         |   |      |  
|Notes payable, maturing, July 2009. Due in monthly installments of $425 of principal and
interest with remaining unpaid balance payable at maturity. Interest accrues at a 10% per annum. This loan was paid in full during 2002.                                                                       |  |      |         |   |      |  
|                                                                                                                                                                                                                                                                                                        |  |      |          |   |      |  
|Total                                                                                                                                                                                                                                                                                                   |  |      | 750,000  |   |      |  
|Less current portion                                                                                                                                                                                                                                                                                    |  |      | (750,000 | ) |      |  
|                                                                                                                                                                                                                                                                                                        |  |      |          |   |      |  
|                                                                                                                                                                                                                                                                                                        |  | $    |         |   |      | $
|                                                                                                                                                                                                                                                                                                        |  |      |          |   |      |  



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---



At December 31, 2002 and 2001,
none of the Companys net book value of property and equipment was collateralized by the various notes payable.



Of the $2.0 million line of credit secured by hotel and construction receivables, $1.5 million is available is secured by hotel accounts receivable and is
available for hotel operating purposes. The remaining $0.5 million is secured by the construction accounts receivable and is available for construction activities.



The following table summarizes the scheduled aggregate principal payments for the notes payable for the five years subsequent
to December 31, 2001 and thereafter:



|2003       |  | $ | 750,000
|---------- |  | - | -------
|Thereafter |  |   |       
|           |  |   |        
|           |  | $ | 750,000
|           |  |   |        



Interest expense of
$4,396, $32,238, and $31,700 for 2002, 2001, and 2000, respectively is included in investment income (expense), net.



|7. |  | Discontinued Operations
|-- |  | -----------------------



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



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The components of income
(loss) from operations related to discontinued operations for the years ended December 31, 2002, 2001 and 2000 are shown below. These include the results of operations through the date of each respective sale for sold properties and a full period of
operations for those assets held for sale for the respective periods.



|                                  |  | Year ended December 31, |          
|--------------------------------- |  | ----------------------- | ---------
|                                  |  | 2002                    |          
|Room rental revenues              |  | $                       | 1,248,271
|Other Inn-related sales           |  |                         | 63,479   
|                                  |  |                         |          
|Total revenue                     |  |                         | 1,311,750
|                                  |  |                         |          
|Expenses:                         |  |                         |          
|Lease expense                     |  |                         | 738,347  
|Room expense                      |  |                         | 418,557  
|General and administrative        |  |                         | 239,028  
|Maintenance                       |  |                         | 149,105  
|Utilities                         |  |                         | 100,662  
|Advertising                       |  |                         | 59,196   
|                                  |  |                         |          
|Total expenses                    |  |                         | 1,704,895
|                                  |  |                         |          
|Loss from discontinued operations |  | $                       | (393,145 
|                                  |  |                         |          



|8. |  | Related Party Transactions
|-- |  | --------------------------



At December 31, 2002, the Company had executed construction contracts with the REIT for an Inn expansion totaling $900,000, of which $264,000 had not been
expended.



The Company shares office space and management with
the REIT. The Company has a Cost Reimbursement Agreement with the REIT whereby the REIT agrees to pay for its share of the use of office space, office equipment, telephones, file and storage space and other reasonable and necessary office equipment
and facilities and personnel costs. Overhead charged to the REIT was approximately $1,574,000, $875,000 and $962,000 for 2002, 2001 and 2000, respectively, pursuant to the Cost Reimbursement Agreement and is reflected as overhead reimbursement
income in the accompanying statements of income.



The
Companys construction contracts with the REIT are generally fixed price and limit the Companys profit on each contract to 10% after considering costs of construction and certain other amounts. The Company does not believe that there were
amounts in excess of such limitations at December 31, 2002, 2001 and 2000.



Although the REIT is the legal borrower of construction loans or related debt, the Company is responsible for interest due on such financing during the construction period as a part of its construction contracts. Construction period
interest incurred during 2002, 2001 and 2000, which is included in cost of revenues earned, totaled approximately $59,000, $510,000 and $1,687,000, respectively. Interest paid includes amounts paid on behalf of the REIT.



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---



On June 5, 2001, the Company
entered into a Capital Refurbishment Agreement with the REIT authorizing the Company to complete all refurbishment projects for Jameson Inns, Inc. The agreement requires the REIT to pay the Company cost, plus a 7% profit margin for the refurbishment
projects. For the years ended December 31, 2002 and 2001, total amounts billed by the Company to the REIT in accordance with the Capital Refurbishment Agreement total $6,924,000 and $6,988,000, respectively, and are included as a component of
construction revenues.



|9. |  | Commitments and Contingencies
|-- |  | -----------------------------



The Company leases approximately 100 billboards from the REIT for initial terms of five years. These leases expire at various dates but generally include
5-year automatic renewal periods; the leases provide for future minimum payments by the Company as follows:



|Year ending December 31, |  |   |          
|------------------------ |  | - | ---------
|2003                     |  | $ | 623,995  
|2004                     |  |   | 638,620  
|2005                     |  |   | 650,642  
|2006                     |  |   | 281,104  
|2007                     |  |   | 195,576  
|                         |  |   |          
|                         |  | $ | 2,389,937
|                         |  |   |          



The Company leases
office space and billboards from 3rd party companies for terms of 1 to 7 years. These leases expire at various dates then may continue on a month-to-month basis pending renewal or cancellation of the leases. The leases provide for future minimum
payments by the Company as follows:



|Year ending December 31, |  |   |          
|------------------------ |  | - | ---------
|2003                     |  | $ | 951,353  
|2004                     |  |   | 147,729  
|2005                     |  |   | 91,854   
|2006                     |  |   | 72,721   
|2007                     |  |   | 75,630   
|Thereafter               |  |   | 160,456  
|                         |  |   |          
|                         |  | $ | 1,499,743
|                         |  |   |          



From time to time, the
Company becomes party to various claims and legal actions arising during the ordinary course of business. Management, after reviewing with legal counsel all actions and proceedings, believes that aggregate losses, if any, would not have a material
adverse effect on the Companys financial position or results of operations.



F-40