<PAGE>   1
  
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    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, 1997 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

                               JAMESON INNS, INC.
             (Exact name of Registrant as specified in its Articles)

<TABLE>
<CAPTION>
     Georgia                                                                        58-2079583
<S>                                                                     <C>
(State or other jurisdiction of incorporation or organization)          (I.R.S. Employer Identification No.)
</TABLE>

             8 Perimeter Center East, Suite 8050, Atlanta, Georgia  30346-1603
               (Address of principal executive offices)             (Zip Code)

Registrant's telephone number, including area code:  (770) 901-9020

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
                               Title of Each Class

                  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 STOCK HELD BY NONAFFILIATES
          OF THE REGISTRANT AS OF JANUARY 31, 1998:        $110,967,636

  NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON JANUARY 31, 1998 -9,775,295

  DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the proxy statement for the annual meeting of stockholders to be 
held June 20, 1998 are incorporated by reference into Part III.


<PAGE>   2



                                    FORM 10-K
                               JAMESON INNS, INC.
                                  ANNUAL REPORT
                          YEAR ENDED DECEMBER 31, 1997

                                Table of Contents

<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                ----
                                     PART I
<S>           <C>                                                                                               <C>
Item 1        Business ...........................................................................................1

Item 2        Properties ........................................................................................27

Item 3        Legal Proceedings .................................................................................31

Item 4        Submission of Matters to a Vote of Security Holders ...............................................31


                                     PART II

Item 5        Market for the Registrant's Common Equity and Related Stockholder Matters .........................31

Item 6        Selected Financial Data ...........................................................................32

Item 7        Management's Discussion and Analysis of Financial Condition and Results 
              of Operations .....................................................................................35

Item 8        Financial Statements and Supplementary Data .......................................................42

Item 9        Changes in and Disagreements with Accountants on Accounting and Financial
              Disclosure ........................................................................................42

                                    PART III

Item 10       Directors and Executive Officers of the Registrant ................................................42

Item 11       Executive Compensation ............................................................................42

Item 12       Security Ownership of Certain Beneficial Owners and Management ....................................42

Item 13       Certain Relationships and Related Transactions ....................................................42


                                     PART IV

Item 14       Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................................42
</TABLE>

<PAGE>   3



                               JAMESON INNS, INC.
                                  ANNUAL REPORT
                       PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                                     PART I

ITEM 1.   BUSINESS.

GENERAL

         Jameson Inns, Inc., a Georgia corporation (the "Company"), is a
self-administered real estate investment trust ("REIT") headquartered in
Atlanta, Georgia which develops and owns limited service hotel properties
("Inns") operating in the southeastern United States under the trademark "The
Jameson Inn(R)." At December 31, 1997, the Company had a total of 84 Inns either
in operation or under development, including 62 Inns in operation (2,924
available rooms), 11 Inns under construction and contracts to acquire 11 parcels
of land on which additional Inns are expected to be constructed during 1998. In
addition, at that date, two of the Inns in operation were undergoing 20-room
expansions. Upon completion of these projects, the Company expects to have 3,844
available rooms.

         The Company focuses on developing Inns in communities in the
southeastern United States which have a strong and growing industrial or
commercial base and a shortage of quality hotel rooms. Generally, the Inns are
rooms-only facilities designed to appeal to price and quality conscious business
travelers, such as sales representatives, government officials and others who
travel to these communities on business, as well as family and leisure travelers
attending activities in the communities such as college and university sponsored
events, fairs, festivals and other cultural events and family reunions. The
standard Inn is initially built as a 40-unit, two-story, Colonial-style
structure constructed on a one- to two-acre tract with an outdoor swimming pool,
fitness center and parking area. As initially constructed, the standard Inn has
38 guest rooms and two executive suites and features amenities such as
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, two Inns were
initially constructed with 60 rooms and other Inns have been expanded one or
more times since their initial construction. At December 31, 1997, 19 of the
operating Inns had 58 or more available rooms each.

         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 facilities and amenities such
as swimming pools, continental breakfast and similar, limited services. The
third category is the all-suite hotel 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 


                                        1


<PAGE>   4



vary by region and locale. The Inns typically fall within the category of small,
limited service, economy hotels.

         The hotel industry is seasonal in nature. Occupancy rates are generally
higher in the second and third calendar quarters than in the first and fourth
quarters. This seasonality can be expected to cause quarterly fluctuations in
the Company's revenues.

         Effective December 28, 1997, all of the Inns are leased to Jameson
Operating Company II, LLC ("JOCLLC") and, prior to that date, to JOCLLC's
predecessor, Jameson Operating Company ("JOC"). JOC was formed in 1993 to
conduct the operation of the Inns and entered into a master lease (the "Initial
Lease") with the Company for that purpose. On February 18, 1998, Jameson
Operating Company II, LLC changed its name to Jameson Operating Company, LLC.
References to the "Operator" throughout this Report refer to either JOCLLC or
JOC as the context requires.

         Also effective December 31, 1997, in order to reduce its state
franchise tax liability, the Company transferred ownership of Inns located in
certain states to subsidiaries of the Company which conduct business only in the
respective states. The Company owns 99.8% of each of these subsidiaries and
various companies wholly-owned by the Company's Chairman, President and Chief
Executive Officer and his spouse, own the remaining 0.2% of the subsidiaries.
(References to the "Company" throughout this Report refer to Jameson, Inns, Inc.
and its subsidiaries on a consolidated basis unless the context requires
otherwise.) Each such subsidiary of the Company leases all of the Inns which it
owns to the Operator under the terms of a master lease covering all Inns located
in the respective state and which is substantially identical to the Initial
Lease. The Initial Lease and each such additional master leases are, as the
context requires, individually or collectively referred to throughout this
Report as the "Lease."

         The Company's executive offices are located at 8 Perimeter Center East,
Suite 8050, Atlanta, Georgia 30346- 1603. The Company's telephone number is
(770) 901-9020.

DEVELOPMENT OF BUSINESS

         The Company was formed in 1988 to develop, own and operate Inns and
elected to be taxed for federal income tax purposes as a REIT beginning January
1, 1994. In 1994 the Company became a publicly held company upon consummation of
an initial public offering of its common stock, par value $.10 per share
("Common Stock").

THE LEASE

         The Company has entered into the Lease with the Operator which covers
all of the completed and operating Inns. Furthermore, new Inns developed by the
Company during the term of the Lease will become subject to the Lease upon
completion of construction. See Item 13. Certain Relationships and Related
Transactions -- The Lease. The following is a summary description of the terms
and conditions of the Lease.

                                        2




<PAGE>   5


         Pursuant to an amendment to the Lease effective December 28, 1997 (the
"Lease Amendment"), the Lease term expires on December 31, 2007, subject to
earlier termination upon the occurrence of certain events. During the term of
the Lease, the Operator is obligated to pay to the Company base rent based on
the number of rooms in operation on the first day of the month and, where
required 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 comprising
the lease by certain percentages. Under the Lease, base rent is payable monthly
and equals $264.00 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 equals the following:

         39% of the first $21.05 of average daily per room rental revenues; plus

         65% 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 the
Operator under the Lease each calendar year, however, is limited to 47% of room
revenues. For purposes of calculating base rent and percentage rent, each master
lease under which the Company or one of its subsidiaries is lessor is treated as
a separate 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 the Operator is
obligated to pay under such Lease.

         Effective January 1, 1998, the $21.05 amount referred to above was
increased to $21.62 for 1998 based on the 2.7% 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, 1997. 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 are determined by dividing room
revenues realized by the Operator 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 Lease include revenues from telephone charges, vending machine
payments and other miscellaneous revenues and exclude all credits, rebates and
refunds, sales taxes and other excise taxes. On or before March 1 of each year,
the Operator is required to provide a calculation of the percentage rent payable
for the preceding year, together with a report by the same independent
accounting firm serving as auditors of the Company's financial statements, on
the amount of room revenues and percentage rent. Total rent, including both base
rent and percentage rent, earned by the Company for the years ended December 31,
1995, 1996 and 1997 was $6.3 million, $9.4 million and $13.0 million,
respectively.

         In addition to paying base rent and, if applicable, percentage rent,
the Lease requires the Operator to pay workers' compensation insurance premiums,
and all costs and expenses incurred in the operation of the Inns. The Company
is responsible for other types of insurance, real and personal

                                        3


<PAGE>   6



property taxes, the costs of replacing or refurbishing furniture, fixtures and
equipment, and the maintenance of structural elements, roofs and underground
utilities.

         The Operator was formed in 1993 to conduct the operation of the Inns
and entered into the Lease with the Company for that purpose. Effective
September 12, 1997 and until December 28, 1997, the Operator was wholly owned by
Thomas W. Kitchin, Chairman, President and Chief Executive Officer of the
Company. On December 28, 1997, Jameson Operating Company II, LLC acquired all of
the assets, liabilities and operations of Jameson Operating Company and
succeeded Jameson Operating Company as lessee and operator of the Inns under the
Lease. Jameson Operating Company II, LLC is also wholly owned by Thomas W.
Kitchin and his spouse. The Operator has only nominal assets, a history of
operating losses and a limited net worth.

         The Company's members of the Board of Directors of the Company who are
not also officers or employees of the Company and who are not affiliated with
the Operator or the Contractor ("Independent Directors") (see -- Growth Plans
for 1998 -- The Contractor, below), approved the Lease Amendment and determined
that the Lease, as amended, is fair to the Company. The Independent Directors
also consented to the purchase of the Operator by Thomas W. Kitchin and the
transfer of the Lease to JOCLLC as required by the terms of the Lease.

         TRADEMARK. The Operator is the owner of the registered trademark, The
Jameson Inn(R). The Lease requires the Operator to operate the Inns using the
trademark and not to use the trademark (or license its use to any other parties)
for the operation of lodging facilities other than the Inns if the Company
objects to such unrelated use. The Company has an option to purchase the
trademark from the Operator 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.

         MAINTENANCE AND MODIFICATIONS. Under the Lease, the Company is required
to maintain the underground utilities and the structural elements of the
improvements and the roof of each Inn. The Operator is required, at its expense,
to maintain the Inns in good order and repair and to make non-structural,
foreseen and unforeseen, and ordinary and extraordinary repairs which may be
necessary and appropriate to keep the Inns in good order and repair.

         The Operator, 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 the Company and in accordance
with plans and specifications approved by the Company. All alterations,
replacements and improvements are subject to all the terms and provisions of the
Lease and become the property of the Company upon termination of the Lease.
Through January 31, 1998, the Operator had not undertaken any significant
capital or non-capital alterations, replacements or improvements to the Inns.

         Hotels in general, including the Inns, have an ongoing need for
renovation and refurbishment. The Company seeks to control such costs through
the construction of new Inns rather than the purchase and renovation of existing
hotel properties. A significant number of the Company's Inns have been
constructed within the past two years and generally do not require any
renovation or refurbishment. Inns older than two years require periodic
replacement of furniture, fixtures and 

                                        4


<PAGE>   7


equipment and the Lease requires that the Company pay the costs of such
refurbishment. The Company has adopted a policy of maintaining sufficient cash
or available borrowings (collectively the "Reserve") to fund expenditures for
replacement and refurbishment of furniture, fixtures and equipment for the Inns
up to an amount equal to 4% of the Operator's total aggregate room revenues
since July 1, 1995, less the amounts actually expended since that date. While
management believes that such amount is adequate to support proper refurbishment
of the Inns, the actual amounts necessary to pay such costs could exceed the
Company's estimate. In such case, expenditure of additional funds for furniture,
fixtures and equipment could have an adverse effect on the Company's ability to
make the full amount of expected distributions to shareholders. See Item 7.
Management's Discussion and Analysis of Operations -- Liquidity and Capital
Resources. As of December 31, 1997, the Reserve totalled approximately $498,000.

         INSURANCE AND PROPERTY TAXES. The Lease provides that the Company is
responsible for paying or reimbursing the Operator 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 the Operator.

         INDEMNIFICATION. The Lease requires the Operator to indemnify the
Company and its affiliates from and against all liabilities, costs and expenses
(including reasonable attorneys' fees and expenses) incurred by, imposed upon or
asserted against the Company or its affiliates, on account of, among other
things, (i) any accident or injury to person or property on or about the Inns,
(ii) any misuse by the Operator, or any of its agents, of the leased property,
(iii) taxes and assessments in respect of the Inns (other than real and personal
property taxes and income taxes of the Company on income attributable to the
Inns), or (iv) any breach of the Lease by the Operator. The Lease does not,
however, require the Operator to indemnify the Company against the Company's
gross negligence or willful misconduct. The Company is required to indemnify the
Operator against any environmental liabilities other than those caused by the
acts or negligent failures of the Operator (for which the Operator will
indemnify the Company).

         ASSIGNMENT AND SUBLEASING. Under the terms of the Lease, the Operator
is not permitted to sublet all or any part of any of the Inns or assign its
interest under the Lease, other than to an affiliate of the Operator controlled
by Mr. Kitchin, without the prior written consent of the Company. No assignment
or subletting will release the Operator from any of its obligations under the
Lease.

         EVENTS OF DEFAULT. Events of default under the Lease include, among
others, the following:

         (i)   the Operator's continuing failure to pay rent for a period of 10
days after receipt by the Operator of written notice of nonpayment from the
Company;

         (ii)  except under certain circumstances, continued failure by the
Operator to observe or perform any other term of the Lease for a period of 30
days after the Operator receives notice of the failure from the Company;

         (iii) the Operator's bankruptcy, insolvency or similar event; and

         (iv)  the Operator's voluntary discontinuation of operations at an Inn
for more than five days, without the consent of the Company, except as a result
of damage, destruction or condemnation.


                                        5


<PAGE>   8


         If an event of default occurs and continues beyond any curative period,
the Company has the option of terminating the Lease as to any individual Inn
(which would not affect the Lease as to the remainder of the Inns) or as to all
of the Inns by giving the Operator 10 days written notice of the termination
date.

         TERMINATION OF LEASE ON DISPOSITION OF THE INNS. If the Company enters
into an agreement to sell or otherwise transfer an Inn, the Company may
terminate the Lease as to that Inn. However, if the Lease is terminated as to
Inns comprising at least 25% of the total rooms of all of the Inns within a
period of 12 consecutive months, the Operator must be compensated for the loss
of its leasehold interest or offered substitute Inns. Most of the Inns have been
mortgaged to secure indebtedness of the Company. See Item 2. Properties --
Mortgage Indebtedness. In the event of a foreclosure sale (or transfer in lieu
of foreclosure) of any Inn, the Lease will terminate with respect to such Inn.

         INVENTORY. The Lease requires all inventory required in the operation
of the Inns to be acquired and replenished by the Operator. Inventory includes
items such as cleaning supplies, linens, towels and paper goods.

FORWARD-LOOKING STATEMENTS

         There are a number of statements in this report which address
activities, events or developments which the Company expects or anticipates will
or may occur in the future, including such things as the Company's expansion
plans, including acquisition of or leasing additional parcels of land,
construction of new Inns and expansion of existing Inns, availability of debt
financing and capital, payment of quarterly dividends and other matters. These
statements are based on certain assumptions and analyses made by the Company in
the light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it believes
are appropriate under the circumstances. However, whether actual results and
developments will conform to the Company's expectations and predictions is
subject to a number of risks and uncertainties, including: (1) the Company's
ability to (a) secure construction and permanent financing to finance such
development on terms and conditions favorable to the Company, (b) assess
accurately the market demand for new Inns and expansions of existing Inns, (c)
identify and purchase new sites which meet its various criteria, including
reasonable land prices, (d) contract for the construction of new Inns and
expansions of existing Inns in a manner which produces Inns consistent with its
present quality and standards at a reasonable cost and without significant
delays, (e) provide ongoing renovation and refurbishment of the Inns sufficient
to maintain consistent quality among the Inns, and (f) manage its business in a
cost-effective manner given the increase in the number of Inns; (2) the
Operator's ability to manage the Inns profitably; (3) general economic, market
and business conditions, particularly those in the lodging industry generally
and in the geographic markets where the Inns are located; (4) the business
opportunities (or lack thereof) that may be presented to and pursued by the
Company; (5) the availability of qualified managers and employees necessary for
the Company's planned growth; (6) changes in laws or regulations; and (7) other
factors, most of which are beyond the control of the Company. Consequently, all
of the forward-looking statements made in this report are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized, or even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.

                                        6


<PAGE>   9




GROWTH PLANS FOR 1998

         The Company's objective is to enhance shareholder value by increasing
Funds from Operations and Cash Available for Distribution by developing
additional Inns, expanding existing Inns and participating, through the Lease,
in increased room revenues generated through operation of the Inns by the
Operator. For definitions and calculation of Funds from Operations and Cash
Available for Distributions, see Item 6. Selected Financial Data and Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Funds from Operations; Cash Available for Distribution.

     DEVELOPMENT OF NEW INNS

         The Company believes that attractive opportunities exist for the
development of new Inns in certain markets in the southeastern United States.
Accordingly, the Company intends to continue developing new Inns in targeted
communities. With operating Inns in Alabama, Georgia, North Carolina, South
Carolina and Tennessee, the Company plans to continue developing Inns in those
states as well as in Florida, Kentucky, Mississippi and Virginia. At December
31, 1997, the Company had a total of 22 Inns under development, including 11
Inns under construction, and contracts to acquire 11 parcels of land on which
additional Inns are expected to be constructed during 1998. In addition, the
Company currently has and will consider long-term ground leases for future Inn
locations. As of December 31, 1997, one of the Inns under construction is being
built on leased land, with a term of 20 years.

         The following sets forth the location of the 11 new Inns under
construction by the Company at December 31, 1997, which have opened or are
expected to open in 1998. Each such Inn initially has or will have 40 rooms. The
Inns in Spartanburg, South Carolina, Dunn, North Carolina and Perry, Georgia
opened in January 1998.

<TABLE>
                <S>                     <C>
                Alabama:                Trussville                             
                Georgia:                Kingsland and Perry
                North Carolina:         Dunn, Eden, Lenoir, Roanoke Rapids and Smithfield
                South Carolina:         Duncan and Spartanburg                                   
                Tennessee:              Cleveland
</TABLE>

         The Company believes that it benefits significantly from its strategy
of developing new Inns rather than acquiring existing properties and
rehabilitating, refurbishing or re-flagging them because of the experience and
track record of the Company, the Contractor (see -- The Contractor, below) and
the Operator in the development, construction and operation of Inns.

         In evaluating potential development sites, the Company targets
communities with strong industrial bases sufficient to attract business
travelers. These communities typically have significant manufacturing
facilities, state and federal government installations, or colleges and
universities. The Company strives to locate its Inns in proximity to
family-style restaurants and targets markets which offer local community events
(e.g. annual festivals, fishing tournaments, collegiate football games and 

                                        7


<PAGE>   10


other athletic events, graduation ceremonies, etc.) and/or tourist and
recreational facilities (e.g. lakes, golf courses, hunting areas, etc.)
attracting groups and individual discretionary and leisure travelers. To date,
the Inns have been generally located in communities with populations up to
100,000 although the Company does not intend to restrict future development of
new Inns to this size of communities. The Company believes that land costs in
the Company's target markets are generally lower than similar costs in major
metropolitan areas.

     EXPANSION OF EXISTING INNS

         The Company intends to continue to expand existing Inns whenever market
conditions warrant. A typical expansion involves adding a stand-alone 20- to
26-room structure to the standard 40-room Inn. To date, 16 Inns have undergone
expansion and, at December 31, 1997, two additional Inns, located in LaGrange,
Georgia, and Forest City, North Carolina, were undergoing 20-room expansions. In
addition, two Inns were initially constructed with 60 rooms in 1997. Because the
Inns are 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 Inns. Accordingly,
the Company can earn attractive returns on its investment by expanding Inns in
markets with strong room demand. In addition, the design of the standard Inn
permits the expansion of an Inn with relatively little disruption to the
existing Inn's operations. Also, as compared to the development of new Inns,
expansion of existing Inns is a relatively lower risk growth strategy since the
Company has an opportunity to assess local room demand and market trends based
on its direct experience in developing and owning the existing Inn.

     THE CONTRACTOR

         It is anticipated that Jameson Development Company, LLC ("Contractor"),
the successor to Jameson Construction Company, will act as general contractor
for new Inns built by the Company as well as expansions of existing Inns. As of
September 30, 1996, Jameson Construction Company assigned all of its contracts
to Jameson Development Company, LLC, a company wholly owned by Thomas W. Kitchin
and his spouse, which was formed in 1996 to act as the Contractor with the same
management and employees as Jameson Construction Company. Jameson Construction
Company was wholly owned by Kitchin Investments, Inc., an entity wholly owned by
Thomas W. Kitchin. Each construction contract for a new Inn or a group of Inns
provides for a fixed turnkey price for all work performed under the contract
subject to reduction, however, if the Contractor'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 and related fitness centers, including interest charges incurred by the
Company on the associated construction debt during construction and working with
the Operator to staff the Inn prior to opening. Each such construction contract
is reviewed by an independent architectural firm and subject to approval by a
majority of the Company's Independent Directors. The average turnkey price for
the 19 new Inns opened during 1997 was approximately $1,435,000. The average
turnkey contract price for each expansion of an existing Inn in 1997 was
approximately $28,000 per room, excluding the amount of any extraordinary site
development costs.


                                        8


<PAGE>   11


      INTERNAL GROWTH

         Through percentage rent, the Company participates in any increases in
room revenues generated through increases in occupancy rates and average daily
room rates ("ADR") of the Inns by the Operator. Total rent payable under the
Lease, including base rent and percentage rent, is limited, however, for each
calendar year to 47% of the Operator's room revenues. See -- The Lease, above.
The Operator practices aggressive market-sensitive pricing, increasing room
rates at particular Inns as market conditions in the specific communities
warrant. The Inns' site managers receive a significant portion of their
compensation based on achieving specified monthly room revenues and annual
expense controls. The Operator promotes an aggressive marketing program which
focuses on local efforts directed to the business community in each Inn's
market. See -- Marketing, below.

MARKETING

         Marketing of the Inns is the responsibility of the Operator and focuses
on local efforts directed to the business community in the city or town where
the particular Inn is located. One of the primary responsibilities of an Inn's
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.
The Operator employs billboards and other similar types of advertising and has
an "800" number to facilitate reservations.

         Beginning in January 1998, the Operator implemented an enhanced
advertising campaign designed to increase the Inns' name recognition in the
southeastern region of the United States and thereby improve occupancy rates at
the Inns. In addition to billboard advertising which the Operator has
traditionally utilized and will continue to utilize, the Operator has placed
advertisements for the Inns on selected television and radio broadcasts, in
regional and special event publications and in newspapers.

COMPETITION

         The hotel industry is highly competitive. Each of the Inns is located
in an area that includes 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 ("REVPAR") of the Inns. 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 the Inn in that
community.

         The Company competes on the basis of price, quality and value. The
Company's competition is made up primarily of limited service hotels in the
southeastern United States operating under national franchises which have
greater financial resources than the Company, substantial advertising budgets,
national reservation systems, marketing 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

                                      9


<PAGE>   12


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 such 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 the Company has not incurred any such costs in
connection with its ownership of the Inns, the Company may be potentially liable
for such costs. The Company generally develops Inns in areas where the
historical use of the land is well known and often agricultural. Management is
not aware of any potential material liability or claims for which the Company
may be responsible. However, no assurances can be given that (i) there are no
material claims or liabilities related to real property ownership by the
Company; (ii) future laws, ordinances or regulations will not impose any
material environmental liability on the Company; or (iii) 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. Under the terms of
the Lease, the Company indemnifies the Operator against environmental
liabilities, except those caused by the acts or negligent failures of the
Operator. In addition, the Lease provides that the Operator will indemnify the
Company against environmental liabilities caused by the Operator's acts or
negligent failures, although the Operator's financial condition may limit the
value of such indemnity and, in any event, such indemnity will not apply to or
protect the Company against past unknown violations and related liabilities. See
-- The Lease.

         The Company believes 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 does not anticipate that it will be required
in the foreseeable future to expend any material amounts in order to comply with
such ordinances and regulations. The Company has not been notified by any
governmental authority, nor is it otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of its present or former properties.

         AMERICANS WITH DISABILITIES ACT. Under the Americans with Disabilities
Act of 1990 (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. The Company believes that all
existing Inns are substantially in compliance with these requirements and
intends to construct future Inns in accordance with such requirements as well.
In 1993, the Company engaged a disabilities consultant to make recommendations
to the Company regarding the Inns' compliance with the ADA. The consultant
submitted a report recommending a number of improvements for access to and use
by disabled persons with respect to certain of the Inns then in operation, which
improvements were made. The Company has also incorporated such consultant's
recommendations into the construction of new Inns.

EMPLOYEES

         At December 31, 1997, the Company employed 12 persons. Employees of the
Company are also employees of Kitchin Investments, Inc., the Operator and the
Contractor. Effective January 1, 1994, under the terms of an agreement covering
the allocation of administrative and overhead costs

                                       10


<PAGE>   13


incurred by the Company and Kitchin Investments, Inc. (the "Cost Reimbursement
Agreement"), the Company reimburses Kitchin Investments, Inc. for the time that
their shared employees spend on the Company's business. For the year ended
December 31, 1997, the Company's reimbursement to Kitchin Investments, Inc.
totalled approximately $220,000. None of the Company's or the Operator's
employees is represented by a union or labor organization, nor have the
Company's or the Operator's operations ever been interrupted by a work stoppage.
The Company considers relations with its employees to be excellent.

THE OPERATOR

         Jameson Operating Company was formed in October 1993 as a wholly owned
subsidiary of the Company, although it had no operations until January 1, 1994.
On December 31, 1993, the Company consummated a series of transactions to remove
all assets not related to ownership of the Inns in contemplation of its initial
public offering of Common Stock and its election to qualify as a REIT for
federal income tax purposes effective January 1, 1994. On December 31, 1993, the
Company sold all of the common stock of the Operator to Thomas W. Kitchin, the
Company's Chairman, President and Chief Executive Officer, and to a grantor
trust of which Steven A. Curlee, the Company's General Counsel and Secretary, is
the trustee and beneficiary. Effective January 1, 1994, the Operator began
leasing the Inns from the Company and from certain partnerships which owned the
Inns until the Company acquired the interests of such partnerships in February
1994 upon consummation of the initial public offering. Prior to 1994, the
Operator's results of operations were included in the consolidated financial
statements of the Company. Effective September 12, 1997, Thomas W. Kitchin, the
Company's Chairman, President and Chief Executive Officer acquired the remaining
outstanding stock of Jameson Operating Company and became its sole stockholder.
On December 28, 1997, Jameson Operating Company II, LLC acquired all of the
assets, liabilities and operations of Jameson Operating Company and succeeded
Jameson Operating Company as lessee and Operator of the Inns under the Lease.
Jameson Operating Company II, LLC is also wholly owned by Thomas W. Kitchin and
his spouse. On February 18, 1998, Jameson Operating Company II, LLC changed its
name to Jameson Operating Company, LLC.

         The Operator leases and operates all completed Inns owned by the
Company under the terms of the Lease. See -- The Lease, above. The names and
certain other information concerning the officers of the Operator are set forth
below. At December 31, 1997, the Operator had a total of 979 employees,
including an administrative staff of 27 employees, 95 Inn managers and assistant
managers and 857 other full- and part-time employees engaged in day-to-day
management and marketing of the Inns. The Operator has only nominal assets, a
history of operating losses and a limited net worth. The audited financial
statements of the Operator appear elsewhere in this Annual Report and should be
referred to for additional financial information concerning the Operator.
Although it has not done so to date, the Operator may engage in activities other
than as lessee of the Inns, subject to certain restrictions under the Lease.


                                       11


<PAGE>   14


         The officers and key employees of the Operator are the following:

<TABLE>
<CAPTION>
      NAME                                                            POSITION
      <S>                                                             <C>
      Thomas W. Kitchin .................................................President and Chief Executive Officer
      William D. Walker .................................................President - Development
      Craig R. Kitchin ..................................................Vice President - Finance, Treasurer, Chief Financial
                                                                         Officer
      Steven A. Curlee ..................................................Vice President - Legal, General Counsel,
                                                                         Secretary
      Robert S. Olliff ..................................................Director of Operations
</TABLE>

         Set forth below is certain information concerning the Operator's
officers, directors and key employees.

         Thomas W. Kitchin is the founder and has been an officer and director
of the Company since its incorporation in 1988. Prior to founding the Company,
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 Association of Publicly Traded Companies, an
association that represents public companies that trade on The Nasdaq Stock
Market, New York Stock Exchange and American Stock Exchange; chairman of the
Georgia Hospitality and Travel Association; director of the American Hotel &
Motel Association; director of the Georgia State University Cecil B. Day School
of Hospitality Administration; director of the Georgia Southern University
Restaurant, Hotel and Institutional Administration Academic Advisory Board; and
director of the Northside Hospital Advisory Board. In addition, he has served on
the board of directors of a private school, several banks and oil companies and
numerous other civic, charitable and social service agencies. Mr. Kitchin is the
father of Craig R. Kitchin, Vice President - Finance, Chief Financial Officer
and Treasurer of the Company.

         William D. Walker 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 twelve years. Mr. Walker
received a B.B.A. degree in finance from Texas Tech University in 1975.

         Craig R. Kitchin became Chief Financial Officer of the Company in
February 1994 and Vice President - Finance in November 1997. 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,
where his primary responsibilities included budgeting and forecasting overhead
expenses. 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,
President and Chief Executive Officer of the Company.

         Steven A. Curlee became General Counsel and Secretary of the Company 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. He continues to serve in
the Navy Reserves,

                                       12


<PAGE>   15


having attained the rank of Commander. 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.

         Robert S. Olliff is Director of Operations of the Operator. From
January 1990 to March 1992, he was a district supervisor for the Company. From
April 1989 to December 1989, he was the manager of the Inn at Statesboro,
Georgia, and from July 1984 to April 1989 was employed as a sales representative
for Morrison Chemical Company, Savannah, Georgia. Mr. Olliff received a B.B.A.
degree in marketing and economics from the University of Georgia in 1965. He is
currently serving as a director and regional vice president of the Georgia
Hospitality and Travel Association.

POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES

         The following is a discussion of the Company's 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 the Board of Directors. No assurance can be given that the
Company's investment objectives will be attained or that the value of the
Company will not decrease.

         INVESTMENT OBJECTIVES AND POLICIES. The Company's investment objective
is to provide quarterly cash distributions and achieve long-term capital
appreciation through increases in cash flow and the value of the Company. The
Company will seek to accomplish these objectives through the ownership and
leasing of the Inns to the Operator, selective development of additional Inns in
the United States, the Operator's increases in the Inns' room revenues and,
where deemed appropriate, renovations and expansions of these properties. A key
criterion for new investments will be that they offer the opportunity for growth
in Funds from Operations and Cash Available for Distribution. For definitions
and calculation of Funds from Operations and Cash Available from Operations, see
Item 6. Selected Financial Data and Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Funds from Operations; Cash
Available for Distribution. The Company anticipates that all of its activities
will be conducted directly, although Inns located in certain states are owned by
subsidiaries of the Company and the Company may participate with other entities
in property ownership, through joint ventures, partnerships or other types of
co-ownership. The Company currently intends to invest only in Inns, although the
Company may also hold temporary cash investments from time to time pending
investment or distribution to shareholders.

         The Company may purchase or lease properties for long-term investment,
expand and improve the Inns, 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 the equity interest of
the Company.

         While the Company emphasizes equity real estate investments, it may, in
its discretion, invest in mortgages, stock of other REITs and other real estate
interests. Such mortgage investments may include participating or convertible
mortgages. However, the Company has not invested previously in mortgages and
stock of other REITs, and does not presently intend to do so.

         DISPOSITIONS. The Company has no current intention to dispose of any of
the Inns, although it reserves the right to do so if, based upon management's
periodic review of the Company's portfolio, 


                                       13

<PAGE>   16


the Board of Directors determines that such action would be in the best
interests of the Company. For a description of certain tax consequences arising
from the disposition of an Inn, see -- Federal Income Tax Considerations, below.

         FINANCING. In January 1997, the Company filed a shelf registration
statement on Form S-3 (the "Registration Statement") with the Securities and
Exchange Commission that provides for the issuance of an aggregate of up to $100
million in Common Stock, Preferred Stock and Common Stock warrants to be offered
and sold from time to time. On March 10, 1997, the Company completed the sale of
2,300,000 newly issued shares of common stock. Net proceeds of approximately $26
million were used to repay certain existing mortgage indebtedness at that date.
In December 1997, the Company mailed proxy statements to the shareholders
requesting shareholder approval of certain amendments to the Company's Amended
and Restated Articles of Incorporation, including an amendment to increase the
number of authorized shares of Common Stock from 20 million to 40 million shares
and the authorized shares of Preferred Stock from 100,000 to 10 million shares.
The shareholders approved the Amendment at a special shareholder's meeting held
February 2, 1998. The Company expects to offer for sale, under the Registration
Statement, 1,000,000 shares of Preferred Stock at an offering price of $25 per
share. The net proceeds, if any, from such offering will be used to repay
indebtedness and for general corporate purposes. The Company intends to use
additional net proceeds, if any, from any sale of securities under the
Registration Statement for the repayment of existing indebtedness, working
capital and general corporate purposes.

         In the event that the Board of Directors determines to raise additional
equity capital, the Board has the authority, without shareholder approval, to
issue additional shares of Common Stock or other capital stock of the Company in
any manner (and on such terms and for such consideration) it deems appropriate,
including in exchange for property. Existing shareholders would have no
preemptive right to purchase shares issued in any offering, and any such
offering might cause a dilution of a shareholder's investment in the Company.

         It is anticipated that any additional borrowings will be made directly
by the Company. Indebtedness incurred by the Company may be in the form of bank
borrowings, secured and unsecured, and publicly and privately placed debt
instruments. Such indebtedness may be recourse to all or any part of the
property of the Company or may be limited to the particular property to which
the indebtedness relates. The proceeds from any borrowings by the Company may be
used for the payment of distributions, working capital, to refinance existing
indebtedness or to finance acquisitions, expansions or development of new Inns.

         At December 31, 1997, the Company had outstanding an aggregate of
approximately $29.6 million of mortgage debt, including approximately $2.8
million in construction debt. The construction debt provides for total
borrowings of $7.45 million and is secured by mortgages on seven Inns. The
Company has adopted a policy of limiting its outstanding indebtedness to 65% of
aggregate gross book value of the Inns (the "Debt Limit"). Management estimates
that the outstanding indebtedness at December 31, 1997 represented approximately
25% of the aggregate gross book value of the Inns. The Company's organizational
documents do not limit the amount or percentage of indebtedness that the Company
may incur. Accordingly, the Board of Directors of the Company could change the
current policies of the Company and the Company could become more highly
leveraged, resulting in an increased risk of default on the obligations of the
Company and in an increase in debt service requirements. Such an increase could
adversely affect the financial condition and results of operations

                                      14


<PAGE>   17


of the Company, the Company's ability to make dividend distributions to its
shareholders and could, as a result, jeopardize the Company's status as a REIT.
See -- Federal Income Tax Considerations, below.

         WORKING CAPITAL RESERVES. The Company's policy is to maintain working
capital reserves (and when not sufficient, access to borrowings) in amounts that
the Board of Directors determines to be adequate to meet normal contingencies in
connection with the operation of the Company's business and investments.

         POLICY REGARDING CAPITAL EXPENDITURES. On July 1, 1995, the Company
adopted a policy of maintaining cash or sufficient access to borrowings equal to
4% of the Inns' aggregate room revenues since July 1, 1995, less amounts
actually spent from that date forward. Prior to this date, the obligation to
fund replacement and refurbishment of furniture, fixtures and equipment was the
Operator's. For the period July 1, 1995, through December 31, 1997, 4% of room
revenues equalled $2,143,000 and the Company expended $1,645,000 on such items
in that same period.

         OTHER POLICIES. The Company intends to operate in a manner that will
not subject it to regulation under the Investment Company Act of 1940. The
Company does not intend to (i) invest in the securities of other issuers for the
purpose of exercising control over such issuer, (ii) underwrite securities of
other issuers or (iii) actively trade in loans or other investments.

         The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
repurchase or otherwise reacquire Common Stock or any of its other securities
and may engage in such activities in the future. During the past four years the
Company has not issued Common Stock or any other securities in exchange for
property, nor has it reacquired any of its Common Stock or any other securities;
however, the Company has authority to engage in such activities and may do so in
the future. Prior to January 1, 1994, the Company made loans to Company officers
in connection with the Company's formation of partnerships to finance
development of new Inns. All such loans were repaid in full at the time such
partnerships were liquidated. The Company may in the future make additional
loans to such persons and entities, including, without limitation, its officers,
and to joint ventures in which it participates. During the last four years,
except in connection with formation of partnerships which, prior to their
liquidation in early 1994 in conjunction with the Company's initial public
offering, were formed by the Company to finance the development of Inns, the
Company has not engaged in trading, underwriting or agency distribution or sale
of securities of other issuers, and the Company does not intend to do so in the
future. The Company's policies with respect to such activities may be reviewed
and modified from time to time by the Board of Directors without the vote of the
shareholders.

         At all times, the Company intends to make investments in such a manner
as to be consistent with the requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), to qualify as a REIT unless, because of circumstances
or changes in the Code (or in the Treasury Regulations), the Board of Directors,
with the consent of a majority of the Company's shareholders, determines to
revoke the Company's REIT election.

         The Company may, under certain circumstances, purchase its shares of
Common Stock in the open market or otherwise. The Company has not repurchased
any shares and the Board of Directors has no present intention of causing the
Company to repurchase any of the shares of Common Stock, 

                                       15


<PAGE>   18


and any such action would be taken only in conformity with applicable federal
and state laws and the requirements for qualifying as a REIT under the Code and
the Treasury Regulations.

         CONFLICTS OF INTEREST. Because of Thomas W. Kitchin's ownership in and
positions with the Company, the Operator, the Contractor and Kitchin
Investments, Inc, there are inherent conflicts of interest in the construction
of new Inns and expansion of existing Inns by the Contractor and in the
Company's dealings with the Operator under the Lease and with Kitchin
Investments, Inc. under the Cost Reimbursement Agreement. See Item 1. Business
-- Growth Plans for 1998 -- The Contractor and -- Employees. In an effort to
reduce the conflicts of interest, any material transaction or arrangement
involving the Company and the Operator or the Contractor, or an affiliate of
either (including Kitchin Investments, Inc.), is subject to approval by a
majority of the Independent Directors. Further, the Operator has agreed that
neither it nor any of its affiliates will (i) operate or manage a hotel property
in which the Company has not invested that is within a 20-mile radius of an Inn,
or (ii) own or have any interest in any hotel property in which the Company or
an affiliate does not have an interest. In addition, Mr. Kitchin is prohibited
under the terms of his employment agreement with the Company from owning,
managing or operating, directly or indirectly, any hotel property other than the
Inns during the term of his employment by the Company or, for two years
following such employment, any hotel property within a 20-mile radius of an Inn.

         In addition, the Board of Directors has a policy that any contract or
transaction between the Company and one or more directors or officers of the
Company, or between the Company and any other entity in which one or more of its
directors or officers are directors or officers, or have a financial interest,
must be approved by a majority of either the 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 the Independent
Directors.

FEDERAL INCOME TAX CONSIDERATIONS

         The following summary of material federal income tax considerations
regarding the Company is based on current law and does not purport to deal with
all aspects of taxation that may be relevant to particular shareholders in light
of their personal investment or tax circumstances, or to certain types of
shareholders (including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws.

         EACH STOCKHOLDER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND SALE OF THE
SHARES OF CAPITAL STOCK OF THE COMPANY AND OF THE COMPANY'S ELECTION TO BE TAXED
AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.

                                       16


<PAGE>   19


     TAXATION OF THE COMPANY

         The Company made an election to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year beginning January 1, 1994. The Company made
such election at the time of the filing of its federal income tax return for
1994. The Company believes that commencing with such taxable year, it was
organized and has operated in such a manner as to qualify for taxation as a REIT
under the Code. The Company intends to continue to operate in such a manner, but
no assurance can be given that it has qualified or will operate in a manner so
as to remain qualified.

         The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. This discussion is qualified in its
entirety by applicable Code provisions, Treasury Regulations and administrative
and judicial interpretations thereof. Conner & Winters, A Professional
Corporation ("Conner & Winters"), has acted as counsel to the Company in
connection with the Company's election to be taxed as a REIT.

         Commencing with the Company's taxable year beginning January 1, 1994,
the Company was organized and believes it has operated in conformity with the
requirements for qualification as a REIT and that its method of operations has
and will continue to meet the Code requirements for qualification and taxation
as a REIT under current Code provisions. The Company's qualification and
taxation as a REIT depends upon its ability to meet, through actual annual
operating results, distribution levels, stock ownership requirements and various
qualification requirements imposed under the Code and discussed below. No
assurance can be given that the actual results of the Company's operations for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of the failure to qualify as a REIT, see -- Failure to
Qualify, below.

         As long as the Company qualifies for taxation as a REIT, it generally
will not be subject to federal corporate income tax on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to federal income or excise tax as follows: First, the Company will be taxed at
regular corporate rates on its REIT taxable income, which is defined generally
as taxable income (subject to certain adjustments), including net capital gains,
less dividends to shareholders. Second, the Company 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 the
Company has (i) 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 (ii) other non-qualifying net income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Company has 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), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy the 75% or 95% gross income tests discussed below
and has nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income tests. Sixth, generally, if the Company should fail to
distribute to its shareholders during each calendar year an amount equal to its
required distribution, it will be subject to a 4% nondeductible

                                       17


<PAGE>   20



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 (i) 85% of its ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year and (iii) the amount, if any, of the
required distribution for the previous year over the amount actually distributed
for that year.

         In addition, pursuant to IRS Notice 88-19, if during the 10-year period
(the "Recognition Period") beginning on the first day of the first taxable year
for which the Company qualified as a REIT, the Company recognizes gain on the
disposition of any asset held by the Company as of the beginning of such
Recognition Period, then, to the extent of the excess of (a) the fair market
value of such asset as of the beginning of such Recognition Period over (b) the
Company's 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 carry forwards of the Company, will be subject to tax
at the highest regular corporate rate, pursuant to regulations that have not yet
been promulgated. The Recognition Period began January 1, 1994 and will expire
December 31, 2003. Further, if the Company acquires any asset from a C
corporation in a transaction in which the basis of the asset in the Company's
hands is determined by reference to the basis of the asset (or any other
property) in the hands of the C corporation, and the Company recognizes gain on
the disposition of such asset during the ten-year period beginning on the date
on which such asset was acquired by the Company, then, to the extent of the
Built-In Gain, such gain will be subject to tax at the highest regular corporate
rate, pursuant to regulations that have not yet been promulgated. The amount of
the Company's Built-In Gain based on the appraisals obtained in connection with
its initial public offering is approximately $8.1 million and will discourage a
disposition by the Company of any Inn held at the time of such offering until
after 2003.

      REQUIREMENTS FOR QUALIFICATION

         The 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 Code; (4) which is neither
a financial institution nor an insurance company subject to certain provisions
of the 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 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 Code and Treasury Regulations promulgated thereunder; and
(9) which meets certain other tests, described below, regarding the nature of
its income and assets. The 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. The Company has met
since the closing of the initial public offering, and currently does meet, all
of such definitional requirements.

                                       18


<PAGE>   21



     INCOME TESTS

         In order for the Company to maintain its qualification as a REIT, it
must satisfy two gross income tests annually. First, at least 75% of the
Company's 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 the
Company's 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 the Company under the Lease 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 Lease should not disqualify rental income received from the
Operator. Second, the 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"). Since the Change Date, the Company has satisfied and will use
its best efforts to continue to satisfy this requirement. Therefore, the
Operator is not and should not become a Related Party Tenant of the Company (by
reason of the Company's adherence to certain stock ownership limitations set
forth in its Articles of Incorporation). 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 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 adjusted
bases of all personal property at the beginning and at the end of each taxable
year bears to the average of the REIT's aggregate adjusted bases of all real and
personal property at the beginning and at the end of such taxable year. Since
January 1, 1994, the Company's rental income attributable to personal property
has been less than 15%; however, should the resulting rental income attributable
to personal property exceed 15% of all rental income, a portion of the personal
property may be sold by the Company to the Operator 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,
the Company may directly perform certain services other than services which are
considered rendered to the occupant of the property. The Company has not, does
not and will not knowingly (i) 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); (ii) rent
any property to a Related Party Tenant; (iii) lease personal property in
connection with the rental of the Inns which would cause the rental income
attributable to such personal property to exceed 15% of the

                                       19


<PAGE>   22


amount of total rental income; or (iv) perform services considered to be
rendered for the occupants of the Inns other than through an independent
contractor.

         Under the Lease, the Operator has leased the land, buildings,
improvements, furnishings, and equipment comprising the Inns from the Company
for a 10-year term. The Operator pays the Company total rent, including base
rent and percentage rent. See Item 1. Business -- The Lease. In order for the
total rent received from the Operator to constitute "rents from real property,"
the Lease must be respected as a true lease for federal income tax purposes and
not treated as a service contract, joint venture or some other type of
arrangement. The determination of whether the Lease is a true lease depends on
an analysis of all of the surrounding facts and circumstances.

         In addition, pursuant to Code Section 7701(e), 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: (i) the service recipient is in physical possession of
the property, (ii) the service recipient controls the property, (iii) 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), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the lease,
(v) the service provider does not use the property concurrently to provide
significant services to entities unrelated to the service recipient and (vi) the
contract price does not substantially exceed the rental value of the property
for the term of the lease.

         Under the Lease, (i) the Operator has the right to exclusive
possession, use and quiet enjoyment of the Inns during the term of the Lease,
(ii) the Operator 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, (iii) the
Operator dictates how the Inns are 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 Lease (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), (iv) the Operator benefits from any savings in the costs of
operating the Inns during the term of the Lease, (v) in the event of damage or
destruction to an Inn, the Operator 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 Lease), (vi) the
Operator has indemnified the Company against all liabilities imposed on the
Company during the term of the Lease by reason of injury to persons or damage to
property occurring at the Inns or due to the Operator's use, management,
maintenance or repair of the Inns, and (vii) the Operator is obligated to pay
substantial fixed rent for the term of the Lease. In addition, the total rent
under the Lease does not substantially exceed the fair rental value of the Inns.

         Pursuant to IRS Revenue Ruling 55-540, if one or more of the following
conditions are present, the Lease will instead be considered as a conditional
contract for purchase and sale of the Inns: (i) portions of the periodic
payments are made specifically applicable to an equity interest in the

                                       20


<PAGE>   23


property to be acquired by the lessee, (ii) the lessee will acquire title upon
the payment of a stated amount of "rentals" under the contract which it is
required to make, (iii) the total amount which the lessee 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, (iv) the
agreed "rental" payments materially exceed the current fair rental value, (v)
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 (vi) some portion of the periodic payments is
specifically designated as interest or is otherwise readily recognizable as the
equivalent of interest.

         Under the Lease, (i) no portion of the total rent has been or will be
applied to any equity interest in the Inns to be acquired by the Operator, (ii)
the Operator 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, (iii) the
total rent does not and will not materially exceed the current fair rental value
of the Inns, (iv) the Inns may not be acquired by the Operator under a purchase
option and (v) 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. Based on the foregoing, the Company believes that the
Lease will be treated as a true lease for federal income tax purposes. However,
no assurance can be given that the IRS will not challenge the tax treatment of
the Lease, or, if it does, that it will not be successful. If the Lease is
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 the
Company receives from the Operator may not satisfy the various requirements for
qualification as "rents from real property." In that case, the Company 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.

         If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will generally be available if (i) the Company's failure
to meet such tests is due to reasonable cause and not due to willful neglect,
(ii) the Company attaches a schedule of the sources of its gross income to its
return, and (iii) any incorrect information on such schedule was not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances the Company 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 the
Company's gross income over the Company's 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 the Company's taxable year, it must
also satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by "real
estate assets" which means (i) real property (including interests in real
property and interests in mortgages on real property), (ii) shares in other
REITs and (iii) 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, (iv) cash, cash items (including
receivables) and government securities. Second, not more than 25% of the
Company's total assets may be

                                       21


<PAGE>   24


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 the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of such issuer's
outstanding voting securities. The Company has satisfied these asset tests since
December 31, 1993 and it will use its best efforts to continue to satisfy such
tests in the future.

         After meeting the assets tests at the close of any quarter, the Company
will not lose its 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 nonqualifying assets within 30 days after the close of that quarter.
The Company believes that it maintains adequate records of the value of its
assets to ensure compliance with the asset test and intends to take such other
action within 30 days after the close of any quarter as may be required to cure
any noncompliance. However, there can be no assurance that such action will
always be successful.

ANNUAL DISTRIBUTION REQUIREMENTS

         The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
at least equal to (A) the sum of (i) 95% of the "REIT taxable income" of the
Company (computed without regard to the dividends paid deduction and any net
capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of noncash income. In
addition, if the Company disposes of any asset during its Recognition Period,
the Company will be required, pursuant to IRS regulations which have not yet
been promulgated, to distribute at least 95% 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 the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration. To
the extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100% of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular corporate tax rates.
Furthermore, as explained above in --Taxation of the Company, if the Company
should fail to distribute its required distribution during each calendar year,
the Company would be subject to a 4% nondeductible excise tax on the excess of
such required distribution over the amounts actually distributed.

         Since January 1, 1994, the Company has made, and hereafter intends to
make, timely distributions sufficient to satisfy all annual distribution
requirements. However, it is possible that, from time to time, the Company may
experience timing differences between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of that income and
deduction of such expenses in arriving at its REIT taxable income. In addition,
as explained above, in the event of the foreclosure of an Inn by a mortgage
lender, any debt discharge income would be subject to the annual 95%
distribution requirement even though the Company would receive no cash as a
consequence of a foreclosure. Therefore, the Company could have less cash
available for distribution than would be necessary to meet its annual 95%
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 95% 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 the Company to borrow funds.

                                       22


<PAGE>   25


         Under certain circumstances, the Company 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 the Company declares a dividend before the date
on which its tax return is due for a taxable year (including extensions) and
distributes 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 by the Company in computing its 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 the Company must elect such
treatment in its return.

         Shareholders receiving subsequent year distributions are taxable on
such distributions in the year of actual receipt except in the following case.
Any distributions declared by the Company 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 the Company and received by the
shareholder on December 31, provided that the distribution is actually paid by
the Company during January of the following calendar year. However, if the
Company actually pays the declared distributions before December 31, the
distributions will be treated as both paid by the Company 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, the Company may elect to distribute an
additional "deficiency dividend," as defined under Section 860 of the 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. The Company 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 the Company's qualification as a REIT would not be
jeopardized due to a failure to meet its annual distribution requirement.

     FAILURE TO QUALIFY

         If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company 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 Code, corporate
distributees may be eligible for the dividends received deduction (such
deduction is not available to corporate distributees so long as the Company
qualifies as a REIT). Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which the Company ceased to
qualify as a REIT.

                                       23


<PAGE>   26



TAXATION OF SHAREHOLDERS

         TAX CONSEQUENCES TO NON TAX-EXEMPT U.S. SHAREHOLDERS. As long as the
Company qualifies as a REIT, distributions made to the Company's 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 the Company's actual net capital gain for the taxable year) without
regard to the period for which a shareholder has held its 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 distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a U.S. shareholder's shares, such distributions will be included in income as
capital gain assuming the shares are held as a capital asset by the U.S.
shareholder. Moreover, U.S. 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 U.S. shareholder who
has held such shares for six months or less (after applying certain holding
period rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain.

         INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING. The Company
will report to its 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 31% 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 the Company 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, the Company may be required to withhold a
portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to the Company. See -- Taxation of Non-U.S.
Shareholders, below.

         TAXATION OF TAX-EXEMPT SHAREHOLDERS. Distributions by the Company 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 Code ("UBTI"),
provided that the tax-exempt entity has not financed the acquisition of its
shares with "acquisition indebtedness" within the meaning of Section 514(c) of
the Code and the shares are not otherwise used in an unrelated trade or business
of the tax-exempt entity. In addition, if the Company is considered to be a
pension-held REIT, then a portion of the dividends paid to qualified trusts (any
trust defined under Section 401(a) and exempt from tax under Section 501(a))
that owns more than 10 percent by value in the REIT may be considered UBTI. A
pension-

                                       24


<PAGE>   27


held REIT is a REIT that is held by one qualified trust holding no 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. The Company has not been and does not expect
to become 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 no attempt will be made herein to provide more
than a summary of such rules. NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX
LAWS WITH REGARD TO THEIR INVESTMENT IN SHARES, INCLUDING ANY REPORTING
REQUIREMENTS.

         Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by the Company of United States real property
interests and not designated by the Company as capital gains dividends will be
treated as dividends of ordinary income to the extent their source is current or
accumulated earnings and profits of the Company. 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 shares of capital
stock of the Company 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). The Company expects 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 (i) a lower treaty rate applies or (ii) the
Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that the
distribution is "effectively connected" income within the meaning of Section 871
of the Code. Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a shareholder to the extent that
such distributions do not exceed the adjusted basis of the shareholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
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 the
Company, 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
current and accumulated earnings and profits, the distribution will be subject
to withholding at a 30% rate. Further, pursuant to recently enacted legislation,
the Company will be required to withhold 10% of any distribution in excess of
current and accumulated earnings and profits. However, amounts withheld may be
refundable if it is subsequently determined that such distribution was in excess
of current and accumulated earnings and profits of the Company and the amount
withheld exceeded the Non-U.S. Shareholder's U.S. tax liability, if any.

         For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company 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

                                       25


<PAGE>   28



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. The Company is required
by Treasury Regulations to withhold 35% of any distribution to a Non-U.S.
Shareholder that could be designated by the Company 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 the Company is 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. The Company believes that it is and
will continue to be a "domestically controlled REIT," and therefore the sale of
its shares has not been and will not be subject to taxation under FIRPTA. The
Company anticipates that sales of the Company's shares by Non-U.S. Shareholders
will not be subject to U.S. taxation unless (i) the investment in the Company's
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 (ii) in the case of a Non-U.S.
Shareholder who is a "nonresident alien individual" under Section 7701(b) of the
Code, 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.

RECENTLY ENACTED OR PROPOSED LEGISLATION

         On August 5, 1997, President Clinton signed into law the Taxpayer
Relief Act of 1997 (the "1997 Act"), which modified certain REIT-related Code
provisions for tax years of the Company beginning on or after January 1, 1998.
The following list sets forth the significant changes contained in the 1997 Act:
(i) the rule disqualifying a REIT for any year in which it fails to comply with
certain regulations requiring the REIT to monitor its stock ownership is
replaced with an intermediate financial penalty; (ii) the rule disqualifying a
REIT that is "closely held" (i.e., during the last half of each taxable year,
50% or more in value of a REIT's outstanding stock is owned by five or fewer
individuals) does not apply if during such year the REIT complied with certian
regulations which require the REIT to monitor its stock ownership, and the REIT
did not know or have reason to know that it was closely held; (iii) a REIT is
permitted to render a de minimis amount of impermissible services to tenants in
connection with the management of property and still treat amounts received with
respect to such property (other than certain amounts relating to such services)
as qualified rent; (iv) the rules regarding attribution to partnerships for
purposes of defining qualified rent and independent contractors are modified so
that attribution occurs only when a partner owns a 25% or greater interest in
the partnership; (v) any corporation wholly owned by a REIT is permitted to be
treated as a qualified REIT subsidiary regardless of whether such subsidiary has
always been owned by a REIT; (vi) the class of excess non-cash items for
purposes of the REIT distribution requirements is expanded; (vii) property that
is involuntarily converted is excluded from the prohibited transaction rules;
(viii) the rules relating to shared appreciation mortgages are modified; (ix)
income from all hedges that reduce the interest rate risk of REIT liabilities,
including rate swap or cap agreements, options, futures and forward rate
contract, is included in qualifying income for purposes of the 95% gross income
test; (x) a REIT is able to elect to retain and pay income tax on its net
long-term capital

                                       26


<PAGE>   29



gains, and if such election is made, the REIT's shareholders include in income
their proportionate share of the undistributed long-term capital gain and are
deemed to have paid their proportionate share of tax paid by the REIT; (xi) the
rules relating to the grace period for foreclosure property are modified; and
(xii) certain other Code provisions relating to REITs are amended. In addition,
a rule which precluded a REIT from deriving 30% or more of its gross income from
certain types of transactions was repealed.

         On February 2, 1998, the Clinton Administration announced its revenue
proposals for the 1998/1999 Federal budget. These proposals contain certain
provisions that, if enacted, would significantly modify the REIT - related Code
provisions. The major changes that have been proposed would: (i) limit the
grandfathered status of existing stapled, or paired-share, REITs by treating the
stapled entities as one entity with respect to properties acquired and
activities or services performed relating to such properties after the effective
date; (ii) restrict impermissible business indirectly conducted by REITs by
prohibiting REITs from acquiring stock that represents more than 10% of the vote
and value of all stock of a corporation after the effective date (subject to
certain grandfather provisions); (iii) modify the treatment of closely held
REITs by imposing as an additional requirement for initial REIT qualification
that no person can own stock of a REIT possessing more than 50% of the total
combined voting power of all classes of voting stock or more than 50% of the
total value of shares of all classes of stock; and (iv) effectively eliminate
the tax-free conversions of large C corporations to REITs by repealing Code
Section 1374 and requiring the conversion to be treated as a liquidation of the
C corporation followed by a contribution of the assets to a REIT. At this time,
it is uncertain whether any or all of these provisions, or additional
provisions, will be enacted, or if enacted, to what extent, if any, they will
materially affect the Company.

OTHER TAX CONSEQUENCES

         The Company and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above.

ITEM 2.  PROPERTIES.

         INNS. The Company focuses on developing Inns in communities in the
southeastern United States which have a strong and growing industrial or
commercial base and a shortage of quality hotel rooms. Generally, the Inns are
rooms-only facilities designed to appeal to price and quality conscious business
travelers, such as sales representatives, government officials and others who
travel to these communities on business, as well as family and leisure travelers
attending activities in the communities such as college and university sponsored
events, fairs, festivals and other cultural events and family reunions. The
standard Inn is initially built as a 40-unit, two-story, Colonial-style
structure constructed on a one- to two-acre tract with an outdoor swimming pool,
fitness center and parking area. As initially constructed, the standard Inn has
38 guest rooms and two executive suites and features amenities such as
remote-controlled television with access to cable programming, including HBO,
free local telephone calls, complimentary continental breakfast and newspaper,
king-sized or double bed, attractive decor, quality furnishings and, in select
rooms, whirlpool baths and small refrigerators. Based on market demand, two Inns
were initially constructed with 60 rooms and other

                                       27


<PAGE>   30


Inns have been expanded one or more times since their initial construction. At
December 31, 1997, a total of 19 Inns had 58 or more available rooms each.

         At December 31, 1997, the Company owned 62 operating Inns and had an
additional 11 Inns under construction. The Company owns the land upon which 70
of these Inns are built or being built and has ground leases on the land on
which three Inns are built or being built. At December 31, 1997, the Company
also had two Inn expansions in progress and sites under contract for an
additional 11 Inns to be developed. The locations of those Inns under
construction is set forth under Item 1. Business -- Growth Plans for 1998. All
62 of the operating Inns are, and all future Inns developed by the Company are
expected to be, leased to and operated by the Operator which is responsible for
the day-to-day management, operation and marketing of the Inns. See Item 1.
Business -- The Lease.

                                       28


<PAGE>   31


         The following table sets forth certain information about the 62
operating Inns at December 31, 1997.

<TABLE>
<CAPTION>
                                                                   YEAR         NUMBER         1997
                                                                  OPENED/         OF        ROOM NIGHTS
   LOCATION                                                      EXPANDED       ROOMS       AVAILABLE (1)
                                                                 --------       -----       -------------
<S>                                                              <C>            <C>         <C>   
ALABAMA:
  Albertville ................................................       94           40           14,600
  Alexander City .............................................      94/95         60           21,900
  Arab .......................................................       95           40           14,600
  Auburn .....................................................       97           40            5,352
  Decatur ....................................................       96           40           14,605
  Eufaula ....................................................       96           40           14,600
  Florence ...................................................      96/96         65           23,725
  Greenville .................................................       96           40           14,600
  Jasper .....................................................       97           40            1,920
  Oxford .....................................................       97           40            8,080
  Ozark ......................................................       95           40           14,600
  Selma ......................................................      92/95         60           21,900
  Sylacauga ..................................................       97           40            3,400
  Tuscaloosa (2) .............................................       97           40            4,280
                                                                                 ---          -------
                                                 Subtotal ....                   625          178,162
                                                                                 ---          -------

GEORGIA:
  Albany .....................................................      95/96         62           22,630
  Americus ...................................................    92/93/94        79           28,835
  Bainbridge .................................................      94/95         60           21,900
  Brunswick ..................................................      95/96         60           21,900
  Calhoun ....................................................      88/94         59           21,535
  Carrollton .................................................      94/95         60           21,900
  Commerce ...................................................       96           40           14,408
  Conyers ....................................................       96           39           14,235
  Covington ..................................................       90           40           13,767
  Douglas ....................................................       95           40           14,524
  Dublin (2) .................................................       97           40            4,308
  Eastman ....................................................       89           41           14,938
  Fitzgerald .................................................       94           40           14,600
  Greensboro .................................................       90           41           14,965
  Hartwell ...................................................       92           40           14,600
  Jesup ......................................................      90/91         61           22,265
  LaGrange (3) ...............................................       96           40           14,600
  Macon ......................................................       97           40              400
  Milledgeville ..............................................       91          100           35,258
  Oakwood ....................................................       97           40           14,232
</TABLE>

                                       29


<PAGE>   32

<TABLE>
  <S>                                                               <C>      <C>              <C>   
  Statesboro .................................................       89           39           13,864
  Thomaston ..................................................      90/96         61           21,900
  Valdosta ...................................................      95/95         55           19,972
  Warner Robins ..............................................       97           59            3,426
  Washington .................................................       90           41           14,965
  Waycross ...................................................      93/96         60           21,878
  Waynesboro .................................................       96           40           14,591
  Winder .....................................................       88           40           14,600
                                                                               -----          -------
                                                 Subtotal ....                 1,417          470,996
                                                                               -----          -------

NORTH CAROLINA:
  Asheboro ...................................................       97           40            3,040
  Forest City (3) ............................................       97           40           12,834
  Laurinburg .................................................       97           40            9,224
  Sanford ....................................................       97           40            4,096
  Wilson .....................................................       97           40              301
                                                                               -----          -------
                                                 Subtotal ....                   200           29,495
                                                                               -----          -------

SOUTH CAROLINA:
  Anderson ...................................................      93/94         60           21,900
  Cheraw .....................................................       95           40           14,600
  Easley .....................................................       95           40           14,600
  Gaffney ....................................................      95/97         58           19,375
  Georgetown .................................................       96           40           14,513
  Greenwood ..................................................      95/96         64           23,193
  Lancaster ..................................................       95           40           14,600
  Orangeburg .................................................       95           40           14,600
  Seneca .....................................................       96           40           14,490
  Simpsonville ...............................................       96           40           14,508
  Union ......................................................       97           40           13,366
                                                                               -----          -------
                                                 Subtotal ....                   502          179,745
                                                                               -----          -------
TENNESSEE:
  Clinton ....................................................       97           40            3,320
  Decherd ....................................................       97           40            8,487
  Johnson City ...............................................       97           60               11
  Tullahoma ..................................................       97           40            7,840
                                                                               -----          -------
                                    Subtotal .................                   180           19,658
                                                                               -----          -------
TOTAL ........................................................                 2,924          878,056
                                                                               =====          =======
</TABLE>

(1)  As to Inns opened or expanded during 1997, room nights available reflects
     all rooms available from the opening date of the Inn or its expansion but
     does not include periods during which rooms may have been unavailable due
     to repairs or renovations.

(2)  Land is subject to a ground lease


                                       30


<PAGE>   33


(3)  A 20-room expansion of this Inn was under construction at December 31, 1997
     and opened in January or February 1998.

         At December 31, 1997, 31 of the Company's 62 operating Inns were
pledged to secure indebtedness under the Company's $36 million credit facility.
In addition, 16 operating Inns were pledged to secure other mortgage
indebtedness and seven of the 11 Inns under construction at December 31, 1997
were pledged to secure construction loans.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company is not a party to any litigation which, in the judgment of
the Company, would have a material adverse effect on its operations or financial
condition if adversely determined. However, due to the nature of its business,
it is, from time to time, a party to certain legal proceedings arising in the
ordinary course of its 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 1997 which required the solicitation of any
proxies.

                                     PART II

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

         As of January 31, 1998, the Company had approximately 530 holders of
record of its Common Stock and, the Company estimates, approximately 7,800
beneficial holders of its Common Stock.

         The following table summarizes each of the dividends declared and paid
on the Common Stock by the Company for the fiscal years ended December 31, 1996
and 1997.

<TABLE>
<CAPTION>
1996                             PER SHARE      DECLARATION             RECORD                PAYMENT
OPERATIONS PERIOD COVERED         AMOUNT           DATE                  DATE                   DATE
-------------------------------------------------------------------------------------------------------------
<S>                              <C>            <C>                   <C>                   <C> 
First Quarter                     $.21          April 29, 1996        May 9, 1996           May 22, 1996
Second Quarter                     .22          July 25, 1996         August 5, 1996        August 22, 1996
Third Quarter                      .22          October 24, 1996      November 6, 1996      November 22, 1996
Fourth Quarter                     .22          January 20, 1997      February 4, 1997      February 20, 1997
                                  ----
     Total                        $.87
</TABLE>

                                       31


<PAGE>   34

<TABLE>
<CAPTION>
1997                             PER SHARE      DECLARATION             RECORD                PAYMENT
OPERATIONS PERIOD COVERED         AMOUNT           DATE                  DATE                  DATE
-------------------------------------------------------------------------------------------------------------
<S>                              <C>            <C>                   <C>                   <C> 
First Quarter                     $.22          April 25 1997         May 5, 1997           May 22, 1997
Second Quarter                     .23          July 21, 1997         August 4, 1997        August 20, 1997
Third Quarter                      .23          October 22, 1997      November 3, 1997      November 20, 1997
Fourth Quarter                     .23          January 22, 1998      February 4, 1998      February 23, 1998
                                  ----
     Total                        $.91
</TABLE>

         The Company intends to continue making regular quarterly distributions
to its shareholders. The Company's cash available for distribution is generally
an amount equal to its net income from operations plus the amount of non-cash
expenses recorded by the Company, such as amortization, depreciation and stock
compensation expenses, less amounts the Company believes should be retained for
working capital purposes, debt service or anticipated capital expenditures.

MARKET INFORMATION

         The Company's Common Stock commenced trading on The Nasdaq Stock Market
National Market on January 27, 1994. Prior thereto there was no public market
for the Common Stock. The table below sets forth the range of high and low sales
prices for the Common Stock from January 1, 1996, through December 31, 1997, for
the periods indicated.

<TABLE>
<CAPTION>
                        PERIOD                    HIGH                    LOW
                         1996
                    <S>                          <C>                      <C>
                    First Quarter                $11 5/8                  $  8 5/8
                    Second Quarter                11                         9 1/4
                    Third Quarter                 10 3/8                     9 1/4
                    Fourth Quarter                13 1/2                     9 7/8


                        1997

                    First Quarter                $13 3/4                  $  11 1/4
                    Second Quarter                12 1/4                     10 7/8
                    Third Quarter                 13 1/8                     11 3/8
                    Fourth Quarter                12 1/2                     11
</TABLE>


ITEM 6.  SELECTED FINANCIAL DATA.

         The following table sets forth selected financial and operating
information on a pro forma and historical basis for the Company. The following
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K. The consolidated historical financial data has been derived from the
audited historical Consolidated Financial Statements. The pro forma data assumes
the Company's 1994 initial public offering and all related transactions occurred
on January 1, 1993, and the Company qualified as a REIT, distributed all of its
taxable income and, therefore, incurred no income tax expense during the period.

                                       32


<PAGE>   35


         Historical financial and operating information of the Company includes
all Inns owned by the Company, including both those under development as well as
operating Inns; however, due to the Company's development of new Inns and
expansion of existing Inns, the information is not comparable between periods.
See Item 2. Properties. Historical operating results, including net income, may
not be comparable to future operating results.

                               JAMESON INNS, INC.
                         SELECTED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                   ---------------------------------------------------------
                                                                                      HISTORICAL
                                                                   ---------------------------------------------------------

                                                                   1993        1994         1995         1996           1997
                                                                   ----        ----         ----         ----           ----
<S>                                                              <C>          <C>          <C>          <C>          <C>    
BALANCE SHEET DATA:
  Investment in real estate (before accumulated depreciation)    $25,247      $38,525      $57,370      $80,816      $117,515
  Net investment in real estate                                   21,909       33,760       50,780       71,611       104,931
  Total assets                                                    23,073       35,074       52,806       73,985       107,606
  Total mortgage debt                                             19,117       11,530       30,214       22,317        29,625
  Stockholders' equity                                             1,279       23,282       21,754       50,763        75,161
</TABLE>

                                       33


<PAGE>   36

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                             ---------------------------------------------------------------

                                                    HISTORICAL            PRO FORMA               HISTORICAL
                                             ----------------------------------------------------------------------
                                                 1993     1994        1993       1994      1995      1996     1997
                                                 ----     ----        ----       ----      ----      ----     ----
                                                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, ADR AND REVPAR)
<S>                                          <C>        <C>         <C>        <C>       <C>       <C>      <C>    
FINANCIAL DATA:
Gross Revenues:(1)
   Lease revenue from Operator ........      $     --  $  3,973     $  2,886  $  3,973  $  6,342  $  9,376  $12,966
   Pre-REIT  total revenues ...........         6,880        --           --        --        --        --       --

EXPENSES:
   Depreciation .......................         1,159     1,427        1,213     1,471     1,825     2,670     3,898
   Inn real estate taxes and insurance            247       412          247       412       514       733     1,107
   Interest expense, net ..............         1,485       339           --       187     1,590     1,386       778
   Corporate administration expenses(2)            --       479          341       479       622       499       445
Income (loss) before limited partners'
   interest and extraordinary item ....           (51)    1,316        1,085     1,424     1,791     4,040     6,595
Income (loss) before extraordinary item          (143)    1,311        1,085     1,424     1,791     4,040     6,595
Extraordinary gain (loss) .............           146      (250)          --        --       (19)     (989)     (689)
Net income ............................             3     1,061        1,085     1,424     1,772     3,051     5,906
Basic earnings per common share(3) ....            --      0.35         0.28      0.42      0.34      0.49      0.64
Diluted earnings per common share(3) ..            --      0.34         0.28      0.37      0.45      0.48      0.63
Dividends paid per common share(4) ....            --      0.50           --        --      0.80      0.86      0.90
Cash flow provided by
   operating activities ...............           933     2,528           --        --     4,181     6,626    11,911
Cash flow used in
   investing activities ...............        (3,614)  (10,845)          --        --   (18,845)  (23,548)  (37,362)
Cash flow provided by 
   financing activities ...............         2,457     8,592           --        --    14,546    16,895    25,581

OTHER DATA:
 Funds from Operations(5) .............      $  1,016  $  2,738     $  2,298  $  2,895  $  3,616  $  6,758  $ 10,637
 Occupancy  Rate ......................          68.2%     70.1%        68.2%     70.1%     67.5%     66.9%     64.9%
 ADR ..................................      $  38.03  $  39.43     $  38.03  $  39.43  $  42.80  $  45.80  $  47.25
 REVPAR ...............................      $  25.94  $  27.64     $  25.94  $  27.64  $  28.89  $  30.64  $  30.68
 Room  Revenues .......................      $  6,322  $  8,373     $  6,322  $  8,373  $ 13,310  $ 19,950  $ 27,588
 Room nights available (6) ............       236,170   295,193      236,170   295,193   448,906   634,549   878,056
 Operating Inns (at period end) .......            15        20           15        20        32        43        62
 Rooms available (at period end) ......           707       966          707       966     1,537     2,107     2,924
</TABLE>


(1)      Revenues for historical 1993 include room revenues of the Inns and
         other revenue of the Company. Revenues in 1994, 1995 and 1996 and the
         1993 and 1994 pro forma periods consist solely of lease payments from
         the Operator calculated using the provisions in the Lease applied to
         the historical room revenues of the Inns.

(2)      Corporate administration expenses for the Company consist of amounts
         allocated from Kitchin Investments, Inc. for salaries for the
         management and overhead of the Company, office, audit, legal and
         printing expenses, etc.

(3)      All earnings per share have been restated to conform to Financial
         Accounting Standards Board Statement No. 128, Earnings Per Share and
         Securities and Exchange Commission Staff Accounting Bulletin No. 98.
         Pro forma earnings per share assume 3,851,752 shares of Common Stock
         outstanding after the Company's initial public offering in February
         1994 were outstanding the entire period, excluding any conversions of
         preferred stock in the basic earnings per share

                                       34


<PAGE>   37



         calculations. See Notes 2 and 6 to the consolidated financial
         statements. Historical earnings per share for historical 1993 are not
         presented as they are not meaningful due to the November 15, 1993
         reincorporation, similar to a recapitalization, and the Company's
         initial public offering described in Note 1 to the consolidated
         financial statements.

(4)      Represents amounts paid during the year and does not equate to
         dividends declared for the year due to the lag between the end of the
         period and payment of dividends.

(5)      Funds from Operations is defined by the National Association of Real
         Estate Investment Trusts ("NAREIT") according to the March 1995
         interpretation as net income (computed in accordance with generally
         accepted accounting principles ("GAAP")) excluding gains (or losses)
         from debt restructuring and sales of property, plus depreciation and
         after adjustments for unconsolidated partnerships and joint ventures.
         The Company has made adjustments to its net income (loss) consisting
         only of depreciation, loss on disposals and the extraordinary item for
         debt restructuring. The Company notes that industry analysts and
         investors use Funds from Operations as another tool to evaluate and
         compare equity REITs. The Company also believes it is meaningful as an
         indicator of net income excluding most non-cash items and provides
         information about the Company's cash available for distributions, debt
         service and capital expenditures. Other non-cash expenses such as
         deferred finance cost amortization and stock option expense have not
         been added back in Funds from Operations. Funds from Operations does
         not represent cash flow from operating activities in accordance with
         GAAP and is not indicative of cash available to fund all of the
         Company's cash needs. Funds from Operations should not be considered as
         an alternative to net income or any other GAAP measure as an indicator
         of performance and should not be considered as an alternative to cash
         flows as a measure of liquidity. In addition, the Company's Funds from
         Operations may not be comparable to other companies' Funds from
         Operations due to differing methods of calculating Funds from
         Operations and varying interpretations of the NAREIT definition.

(6)      Room nights available reflects all rooms available from the opening
         date of the Inn or its expansion but does not include periods during
         which rooms may have been unavailable due to repairs or renovations.

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

         The following discussion should be read in conjunction with the
Company's historical and pro forma consolidated financial statements and notes
thereto appearing elsewhere in this Annual Report. Such financial statements and
information reflect the historical operations of the Company through December
31, 1997.

         The Company has grown from a hotel chain with four Inns, or 162 rooms,
at January 1, 1990, to 62 Inns, or 2,924 rooms, in operation at December 31,
1997. From its inception in 1988 until December 31, 1993, the Company was
engaged in the business of developing, owning and managing Inns. As part of its
development activities, the Company engaged in development and construction of
new Inns. On December 31, 1993, the Company reorganized by divesting itself of
the subsidiary corporations through which it conducted its construction
activities, securities brokerage activities and aviation operations. In
addition, the Company transferred its outdoor advertising business to the
predecessor to Jameson Outdoor Advertising Company, LLC, which is wholly owned
by the

                                       35


<PAGE>   38


Company's President, Chairman, Chief Executive Officer and largest stockholder
and his wife. The Company no longer manages or operates the Inns upon their
completion, but limits its activities to developing and owning the Inns. The
Operator leases the Inns from the Company and operates them.

         The 1993 and 1994 pro forma financial information has eliminated those
businesses which the Company has not been engaged in since it divested itself of
these businesses on December 31, 1993, so as to be comparable to the 1995, 1996
and 1997 historical financial information. Although in 1994, 1995, 1996 and
1997, room revenues were earned by the Operator, not the Company, they are the
basis upon which the percentage rent paid to the Company by the Operator under
the Lease is determined and, accordingly, such revenues are discussed below. The
term "Same Inn Room Revenues" refers to revenues earned with respect to Inns
which were operating during all of both comparison periods and includes revenues
attributable to rooms added to existing Inns by virtue of expansion of such
Inns.

         Effective January 1, 1994, the Company's primary source of revenue
became Lease payments by the Operator under the Lease, and prior thereto under
the predecessor leases with the partnerships which previously owned certain of
the Inns. The expenses of the Company consist of property taxes, insurance,
corporate overhead, compensation expense (or income) related to certain stock
options, interest on mortgage debt and depreciation of the Inns. The Lease
provides for the payment of base rent and percentage rent. For the year ended
December 31, 1997, base rent and percentage rent in the aggregate amount of
$13.0 million was earned by the Company. The principal determinant of percentage
rent under the Lease is room revenues of the Inns. Therefore, management
believes that a review of the historical performance of the operations of the 62
operating Inns, particularly with respect to occupancy, ADR and REVPAR, is
appropriate for understanding the Lease revenue (see -- Funds from Operations;
Cash Available for Distribution, below, for the calculation of ADR and REVPAR).

RESULTS OF OPERATIONS

         COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED
DECEMBER 31, 1996. Lease revenue for the Company for 1997 increased 38% to $13.0
million as compared to $9.4 million for 1996. The increase was due to an
increase in the Operator's room revenues.

         The number of room nights available increased from 634,549 in 1996 to
878,056 in 1997, or 38%, due to the opening from January 1996 through December
1997 of 30 new 40-room Inns, two new 60-room Inns and seven 20- to 26-room
expansions of existing Inns. The occupancy rate decreased from 66.9% for 1996 to
64.9% for 1997, while the ADR increased 3% from $45.80 in 1996 to $47.25 in
1997. As a result of these three factors, room revenues rose 38%, from $20
million for 1996 to $27.6 million in 1997. Same Inn Room Revenues for 1997
versus 1996 grew to $18.4 million from $18.3 million, or 1%. The growth is due
to an increase in ADR from $45.62 to $46.60 for these Inns and an increase in
room nights available (due to expansions of certain of these Inns) from 582,840
to 601,264 partially offset by a decrease in the occupancy rate from 67.0% to
64.0% for these Inns for 1997 compared to 1996. The decrease in overall
occupancy of the Inns is attributable primarily to (i) the expansion of several
high occupancy Inns which then experienced lower occupancy rates because of the
additional rooms available in the marketplace, (ii) the opening of new Inns
which typically require several months of operations before realizing higher
occupancy rates and (iii) additional

                                       36


<PAGE>   39


competition in certain markets. During 1997 and 1996, the Lease revenue was
affected by the limitation equal to 47% of room revenues for the year.

         General and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office. General
and administrative expense for 1997 was $445,000, as compared to $499,000 for
1996, due to less time spent by shared employees on the Company's business
matters as compared to the Operator's, Contractor's and other related entities'.
See Item 1. Business -- Employees, and -- Policies and Objectives with Respect
to Certain Activities -- Conflicts of Interest.

         Property taxes and insurance expenses totaled $1.1 million in 1997,
compared with $733,000 for 1996. The increase is attributable to the increase in
the number of Inns and the expansion of existing Inns

         Interest expense decreased from $1.4 million in 1996 to $.8 million in
1997 due to the repayment of approximately $25.6 million and $30.8 million in
debt in March 1997 and April 1996, respectively. Proceeds to pay down debt were
generated by the sale of 2.3 million and 3.3 million shares of Common Stock in
March 1997 and April 1996, respectively. As a result of the early extinguishment
of debt in 1997 and 1996, the Company had losses of $689,542 and $989,376,
respectively, comprised of the write-offs of deferred finance costs and
prepayment penalties, which are reflected as extraordinary items.

         Depreciation expense increased from $2.7 million in 1996 to $3.9
million in 1997, due to an increase in the number of operating Inns and the
expansion of existing Inns.

         COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED
DECEMBER 31, 1995. Lease revenue for the Company for 1996 increased 49% to $9.4
million as compared to $6.3 million for 1995. The increase was due to the
increase in the Operator's room revenues, partially offset by the effect of a
change in the percentage rent formula under the Lease amendment effective July
1, 1995.

         The number of room nights available increased from 448,906 in 1995 to
634,549 in 1996, or 41%, due to the opening from January 1996 through December
1996 of 11 new 40-room Inns and six 20- to 26-room expansions of existing Inns.
The occupancy rate decreased from 67.5% for 1995 to 66.9% for 1996. However, ADR
increased 7% from $42.80 in 1995 to $45.80 in 1996. As a result of these three
factors, room revenues rose 50%, from $13.3 million for 1995 to $20 million in
1996. Same Inn Room Revenues for 1996 versus 1995 grew to $13.8 million from
$12.1 million, or 14%. The growth is due to an increase in ADR from $42.73 to
$45.76 for these Inns and an increase in room nights available (due to
expansions of certain of these Inns) from 400,187 to 445,451, partially offset
by a decrease in the occupancy rate from 68.8% to 66.1% for these Inns for 1996
compared to 1995. The decrease in overall occupancy of the Inns is attributable
primarily to (i) the expansion of several high occupancy Inns which then
experienced lower occupancy rates because of the additional rooms available in
the marketplace, and (ii) the opening of new Inns which typically require
several months of operations before realizing higher occupancy rates and (iii)
additional competition in certain markets. During 1996, the Lease revenue was
affected by the limitation equal to 47% of room revenues for the year.

                                       37


<PAGE>   40

         General and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office. General
and administrative expense for 1996 was $499,000, as compared to $622,000 for
1995, due to less time spent on the Company's business matters as compared to
the Operator's, Contractor's and other related entities'. See Item 1. Business
-- Employees, and -- Policies and Objectives with Respect to Certain Activities
-- Conflicts of Interest.

         Property taxes and insurance expenses totaled $733,000 in 1996,
compared with $514,000 for 1995. The increase is attributable to the increase in
the number of Inns and the expansion of existing Inns.

         Interest expense decreased from $1.6 million in 1995 to $1.4 million in
1996 due to the repayment of approximately $30.8 million in debt in April 1996
with proceeds from the sale of 3.3 million shares of Common Stock. As a result
of the early extinguishment of this debt in 1996, the Company had a loss of
$989,376, comprised of the write-offs of deferred finance costs, which are
reflected as extraordinary items.

         Depreciation expense increased from $1.8 million in 1995 to $2.7
million in 1996, due to an increase in the number of operating Inns and the
expansion of existing Inns.

FUNDS FROM OPERATIONS; CASH AVAILABLE FOR DISTRIBUTION

         The following table illustrates the Company's calculation of Funds from
Operations and Cash Available for Distribution on an historical basis for the
years ended December 31, 1995, 1996 and 1997. In March 1995, NAREIT published a
new interpretation of Funds from Operations which the Company retroactively
adopted at that time.

<TABLE>
<CAPTION>

                                                                YEAR ENDED DECEMBER 31,
                                                         -----------------------------------

                                                            1995         1996           1997
                                                                  ($ IN THOUSANDS)

<S>                                                      <C>           <C>           <C>  
Net Income ........................................      $ 1,772       $ 3,051       $  5,906
Add:...............................................
    Depreciation expense ..........................        1,825         2,670          3,898
    Loss on disposals .............................           --            48            144
    Extraordinary item ............................           19           989            689
                                                         -------       -------       --------

Funds from Operations, per March 1995
   NAREIT interpretation ..........................        3,616         6,758         10,637
Add:
   Stock compensation expense .....................           77            --             --
   Loan fee amortization expense ..................           87            93             80
Less:
   Additions to reserve for furniture, fixtures and
      equipment(1) ................................         (288)         (778)        (1,077)
   Required loan principal repayments .............         (218)         (319)           (78)
                                                         -------       -------       --------
</TABLE>


                                       38


<PAGE>   41


<TABLE>
<S>                                                      <C>           <C>           <C>  
Cash Available for Distribution ...................      $ 3,274       $ 5,754       $  9,562
                                                         -------       -------       --------
</TABLE>


(1)      Prior to July 1, 1995 the Operator was responsible for the replacement
         and refurbishment of furniture, fixtures and equipment. After that date
         and in conjunction with the Lease amendment, the Company assumed this
         responsibility. This amount equals 4% of the Inns' aggregate room
         revenues for the period.

         Funds from Operations is defined by NAREIT according to the March 1995
interpretation as net income (computed in accordance with generally accepted
accounting principles ("GAAP") excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and after adjustments for
unconsolidated partnerships and joint ventures. The Company has made adjustments
to its net income (loss) consisting only of depreciation, loss on disposals and
the extraordinary item for debt restructuring. The Company notes that industry
analysts and investors use Funds from Operations as another tool to evaluate and
compare equity REITs. The Company also believes it is meaningful as an indicator
of net income excluding most non-cash items and provides information about the
Company's cash available for distributions, debt service and capital
expenditures. Other non-cash expenses such as deferred finance cost amortization
and stock option expense have not been added back in Funds from Operations.
Funds from Operations does not represent cash flow from operating activities in
accordance with GAAP and is not indicative of cash available to fund all of the
Company's cash needs. Funds from Operations should not be considered as an
alternative to net income or any other GAAP measure as an indicator of
performance and should not be considered as an alternative to cash flows as a
measure of liquidity. In addition, the Company's Funds from Operations may not
be comparable to other companies' Funds from Operations due to differing methods
of calculating Funds from Operations and varying interpretations of the NAREIT
definition.

         Cash Available for Distribution is calculated as Funds from Operations
plus non-cash stock option expense and loan fee amortization, less amounts
estimated for future replacement and refurbishment of furniture, fixtures and
equipment and required loan principal repayments. On July 1, 1995, the Company
adopted a policy of maintaining cash or sufficient access to borrowings equal to
4% of the Inns' aggregate room revenues since July 1, 1995, less amounts
actually spent from that date forward. Prior to this date, the obligation to
fund replacement and refurbishment of furniture, fixtures and equipment was the
Operator's. For the period July 1, 1995, through December 31, 1997, 4% of room
revenues equalled $2,143,000 and the Company expended $1,645,000 on such items
in that same period. In addition, the Company expects to retain some portion of
the Cash Available for Distribution for working capital and capital
expenditures.

LIQUIDITY AND CAPITAL RESOURCES

         Since its election to be taxed as a REIT, the Company has financed and
currently intends to continue financing the construction of new Inns entirely
with bank borrowings. At December 31, 1997, the Company had approximately $29.6
million in outstanding debt. It is management's intention to continue to borrow
from some or all of its previous lenders to finance future projects.

         The Company has a $36 million line of credit (the "Line") convertible
in June 1999 to a term note. At December 31, 1997, the Company had drawn down
$11.3 million under the Line with $24.7 million remaining available credit.
Loans made under the Line bear interest at rates initially ranging 

                                       39


<PAGE>   42

from 8.5% to 8.75%, which are adjustable annually to equal a major lender's
prime rate as published in the Wall Street Journal plus .25 or .5 percentage
points. The minimum annual interest rate payable under the Line is 7% and the
maximum is 13%. The annual interest rates at December 31, 1997 ranged from 8.75%
to 9%. Loans made under the Line are secured by mortgages on 31 of the Inns.
Payments of interest are due monthly, and monthly payments of principal commence
in June 1999. Principal on loans under the Line is amortized using a 15-year
period and is payable in full in May 2006.

         Construction and long-term mortgage financing are expected to be
available to fund the balance of construction costs not funded under the Line.
For each new Inn developed by the Company, generally a construction loan for
approximately $1.1 million has been obtained. Each construction loan converts to
a long-term mortgage financing upon completion of the Inn without any further
action by the Company. Each of the mortgage and construction loans outstanding
at December 31, 1997, is amortized over 15 years and is payable in full seven
years from its inception. The interest rate on each of such loans is adjusted
annually, after an 18-month interest-only period, to the prime rate then
prevailing plus .25% to 1.5% with a floor of 7% and a cap of 12%, with no annual
change greater than 1%. As of December 31, 1997, the construction loans are
secured by mortgages on seven of the Inns under construction.

         The Company believes it can continue to finance new Inns with these
construction and long-term mortgage loans. As of December 31, 1997, the Company
had 15 operating Inns which were debt free and could be used as collateral
should the Company need additional borrowing capacity. Generally, Inn expansions
are also financed through construction loans. Management believes the Company
can adequately meet its financing needs for the next year through the
traditional debt financing methods available to the Company. The Company is
negotiating with its lenders to increase the Line to an aggregate of $55
million, but has not received any commitment regarding such increase. Since the
Company presently intends to rely primarily on borrowings for construction and
permanent financing of new Inns and the expansion of existing Inns, the lack of
sufficient financing on favorable terms and conditions could prevent or
significantly deter the Company from constructing new Inns or expanding existing
Inns. The availability of such financing depends on a number of factors over
which the Company has no control, including general economic conditions, the
economic and competitive environments of the communities in which the Inns are
located and the level and stability of long-term interest rates. The Company
also is considering possible additional long-term debt or equity financing that
would be available to fund its ongoing development activities.

         In January 1997, the Company filed a shelf registration statement on
Form S-3 (the "Registration Statement") with the Securities and Exchange
Commission that provides for the issuance of an aggregate of up to $100 million
in Common Stock, Preferred Stock and Common Stock warrants to be offered and
sold from time to time. On March 10, 1997, the Company completed the sale of
2,300,000 newly issued shares of common stock. Net proceeds of approximately $26
million were used to repay certain existing mortgage indebtedness at that date.
In December 1997, the Company mailed proxy statements to shareholders requesting
shareholder approval of certain amendments to the Company's Amended and Restated
Articles of Incorporation, including an amendment to increase the number of
authorized shares of Common Stock from 20 million to 40 million shares and the
authorized shares of Preferred Stock from 100,000 to 10 million shares. The
shareholders approved such amendments at a special shareholder meeting held
February 2, 1998. The Company expects to offer for sale 1,000,000 shares of
Preferred Stock in 1998 under the Registration 

                                       40


<PAGE>   43


Statement. The net proceeds, if any, from such offerings will be used to repay
indebtedness. The Company intends to use future net proceeds, if any, from any
additional sales of securities under such registration statement for the
repayment of existing indebtedness, working capital and general corporate
purposes.

         The Company expects to continue to develop additional Inns as suitable
opportunities arise, and the Company will not undertake investments unless
adequate sources of financing are available. As of December 31, 1997, the
Company had also borrowed approximately $2.8 million to finance the construction
of new Inns at Kingsland and Perry, Georgia; Dunn, Lenoir and Smithfield, North
Carolina; Duncan and Spartanburg, South Carolina. In addition, the Company is
negotiating construction loans for the construction of new Inns at Trussville,
Alabama; Eden and Roanoke Rapids, North Carolina; Cleveland Tennessee. Total
construction costs of these 11 Inns, excluding land and closing costs, is
expected to be $15.7 million when complete. The Company is also currently
expanding the Inns in Forest City, North Carolina and LaGrange, Georgia. The
expansions are being financed under the Line. The Company may in the future
expand additional Inns if management determines that sufficient market demand
exists and financing is available for any such expansion.

         As with most real estate investments, the Company's investments in the
Inns are relatively illiquid and such illiquidity is further increased by the
Inns' location in small communities. As a result, the ability of the Company to
sell or otherwise dispose of any Inn to provide liquidity will be very limited.

         In connection with its initial public offering in 1994, the Company
sold to Commonwealth Associates, for an aggregate of $260, warrants to purchase
up to 260,000 shares of Common Stock at an exercise price of $14.85 per share
exercisable at any time until January 27, 1999.

         The Company has four stock incentive plans in place. As of December 31,
1997, 829,010 shares were reserved for future grants and 807,851 options were
outstanding (including 365,855 which were exercisable). In addition, as of
December 31, 1997, 64,401 shares of Common Stock issued to certain key employees
are restricted as to sale until fully vested in 2006 and 2007.

YEAR 2000

         Based on a recent assessment the Company believes that the arrival of
the year 2000 and the potential related computer problems should not have a
material impact on either the Company or the Operator, and that their current
software is year 2000 compliant.

INFLATION

         Operators of hotels in general possess the ability to adjust room rates
quickly. Although the Operator raised its room rates by approximately 5% in July
1994 and April 1995, 7% in 1996 and 3% in 1997, competitive pressures have
limited, and may in the future limit, the Operator's ability to raise rates in
the face of inflation.

                                       41


<PAGE>   44


SEASONALITY

         The Inns' historical operations have been seasonal in nature,
reflecting higher occupancy rates in the second and third quarters. This
seasonality can be expected to cause fluctuations in the Company's Lease revenue
that it receives from the Operator.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The financial statements and supplementary data are indexed in Item 14
hereof.

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

         None.


                                    PART III

         The information required to be contained in Items 10-13 of this Annual
Report is incorporated by reference to the Company's definitive proxy statement
to be filed with respect to its 1998 annual meeting of stockholders.


                                     PART IV

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

<TABLE>
<CAPTION>
(a)       1.  Financial Statements of Jameson Inns, Inc.                                                        Page(s)

          <S>                                                                                                   <C>
          Report of Independent Auditors...........................................................................F-1
          Consolidated Balance Sheets as of December 31, 1996 and 1997.............................................F-2
          Consolidated Statements of Operations for the years ended 
              December 31, 1995, 1996 and 1997.....................................................................F-3
          Consolidated Statements of Stockholders' Equity for the years ended 
              December 31, 1995, 1996 and 1997.....................................................................F-4
          Consolidated Statements of Cash Flows for the years ended 
              December 31, 1995, 1996 and 1997 ....................................................................F-5
          Notes to Consolidated Financial Statements...............................................................F-7
</TABLE>

                                       42


<PAGE>   45

<TABLE>
          <S>                                                                                               <C>
          2.  Financial Statement Schedules

          Schedule III - Real Estate and Accumulated Depreciation...........................................F-21
          Notes to Schedule III.............................................................................F-24

          All other schedules have been omitted since the required information 
          is not present, or is not present in amounts sufficient to require
          submission of the schedule, or because the information required is
          included in the financial statements and notes thereto.

          3.  Financial Statements of Jameson Operating Company II, LLC and its 
              Predecessor, Jameson Operating Company
              
          Report of Independent Auditors....................................................................F-25
          Balance Sheets as of December 31, 1997 and 1996...................................................F-26
          Statements of Operations for the years ended December 31, 1997, 1996 and 
              1995..........................................................................................F-27

          Statements of Members' Capital and Stockholders' Deficit for the years 
              ended December 31, 1997, 1996 and 1995........................................................F-28
          Statements of Cash Flows for the years ended December 31, 1997, 1996 and 
              1995..........................................................................................F-29
          Notes to Financial Statements.....................................................................F-31
</TABLE>

                                       43


<PAGE>   46








                                Index to Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S>    <C>   <C>                                                                        
3.1    -     Articles of Incorporation of the Registrant incorporated by reference
                 to Exhibit 3.1.1 to the Registration Statement filed on Form
                 S-11, File No. 33-71160

3.2    -     Articles of Amendment to the Articles of Incorporation of the
                 Registrant incorporated by  reference to Exhibit 3.1.2 to the
                 Registration Statement filed on Form S-11,  File No. 33-71160

3.3    -     Articles of Amendment to the Articles of Incorporation of the
                 Registrant Setting forth the Designation of Preferences, Rights,
                 Privileges and Restrictions of Preferred Stock Registrant
                 incorporated by reference to Exhibit 2.1 to the Registrant's Form
                 10-K/A1 (Amendment No. 1 to the Registrant's Annual Report on Form
                 10-K) for the year ended December 31, 1993

3.4    -     Article of Amendment to the Articles of Incorporation of the
                 Registrant  incorporated by reference to Exhibit 3.3.1 to Form
                 10-K/A2 (Amendment No. 2 to the Registrant's Annual Report on Form
                 10-K) for the year ended December 31, 1993

3.5    -     Articles of Amendment to the Articles of Incorporation of the
                 Registrant Amending the Designation of Preferences, Rights,
                 Privileges and Restrictions of Preferred Stock of the Registrant
                 incorporated by reference to Exhibit 3.6 to the  Registrant's
                 Annual Report on Form 10-K for the year ended December 31, 1994

3.6    -     Bylaws of the Registrant incorporated by reference to Exhibit 3.2.1
                 to the Registration Statement on Form S-11, File No. 33-71160
</TABLE>

                                       44



<PAGE>   47





<TABLE>
<S>    <C>   <C>                                                                      
3.7    -     Amendment to the Bylaws of the Registrant incorporated by reference
                 to Exhibit 3.2.2 to the Registration Statement on Form S-11,
                 File No. 33-71160

3.8    -     Amendment No. 2 to Registrant's Bylaws incorporated by reference to
                 Exhibit 3.8 to the Annual Report filed on Form 10-K for the year
                 ended December 31, 1995

4.1    -     Specimen Certificate of Common Stock incorporated by reference to
                 Exhibit 4.1 to the Registration Statement on Form S-11, File No.
                 33-71160

4.2    -     Warrant issued to Commonwealth Associates incorporated by reference
                 to Exhibit 4.2.1 to the Registration Statement on Form S-11, File
                 No. 33-71160

10.1   -     Master Lease Agreement incorporated by reference to Exhibit 10.1 to
                 the Annual Report filed on Form 10-K for the year ended
                 December 31, 1993

10.2   -     Amendment No. 1 to Master Lease Agreement between Jameson Inns, Inc.
                 and Jameson Operating Company (revised) incorporated by reference
                 to Exhibit 10.2 to the Annual Report filed on Form 10-K for the
                 year ended December 31, 1995

10.3   -     Amendment No. 2 to Master Lease Agreement between Jameson Inns, Inc.
                 and Jameson Operating Company incorporated by reference to
                 Exhibit 10.3 to the Annual Report filed on Form 10-K for the year
                 ended December 31, 1996

10.4   -     Amendment No. 3 to Master Lease Agreement between Jameson Inns, Inc.
                 and Jameson Operating Company incorporated by reference to
                 Exhibit 10.4 to the Annual Report filed on Form 10-K for the year
                 ended December 31, 1996

10.5   -     Amendment No. 4 to Master Lease Agreement between Jameson Inns, Inc.
                 and Jameson Operating Company

10.6   -     Schedule of documents substantially similiar to Exhibit 10.1
</TABLE>

                                       45



<PAGE>   48






<TABLE>
<S>    <C>   <C>                                                              
10.7   -     Cost Reimbursement Agreement between Jameson Inns, Inc. and Kitchin
                 Investments, Inc. incorporated by reference to Exhibit 10.2 to
                 the Registration Statement on Form S-11, File No. 33-71160

10.8   -     Construction Contract between Jameson Inns, Inc. and Jameson
                 Construction Company for construction of Inns in Alexander City,
                 Decatur, Eufala and Florence, Alabama;  Albany,  Bainbridge,
                 Brunswick, LaGrange, Thomaston, Waycross and Waynesboro, Georgia;
                 and Union, South  Carolina, incorporated by reference to Exhibit
                 10.7 to the Annual Report filed on Form 10-K for the year ended
                 December 31, 1995

10.9   -     Schedule of documents substantially similar to Exhibit 10.8

10.10  -     Jameson 1993 Stock Incentive Plan incorporated by reference to
                 Exhibit 10.22.1 to the Registration Statement on Form S-11, File
                 No. 33-71160

10.11  -     Form of Stock Option Agreement under Jameson Inns, Inc. Stock
                 Incentive Plan incorporated by reference to Exhibit 10.23 to the
                 Registration Statement on Form S-11, File No. 33-71160

10.12  -     Amendment No. 1 to Jameson 1993 Stock Incentive Plan incorporated by
                 reference to Exhibit 10.10 to the Annual Report filed on Form
                 10-K for the year ended December 31, 1995

10.13  -     1994 Amendment to Jameson 1993 Stock Incentive Plan incorporated by
                 reference to Exhibit 10.11 to the Annual Report filed on Form 10-K
                 for the year ended December 31, 1995

10.14  -     Amendment No. 3 to Jameson 1993 Stock Incentive Plan incorporated by
                 reference to Exhibit 10.12 to the Annual Report filed on Form 10-K
                 for the year ended December 31, 1995
</TABLE>



                                       46



<PAGE>   49






<TABLE>
<S>    <C>  <C>                                                                               
10.15  -    Jameson Inns, Inc. Director Stock Option Plan incorporated by
                reference to Exhibit 10.13 to the Annual Report filed on Form
                10-K for the year ended December 31, 1995

10.16  -    Jameson 1996 Stock Incentive Plan incorporated by reference to
                Exhibit 10.45 to the Annual Report filed on Form 10-K for the
                year ended December 31, 1996

10.17  -    Jameson 1997 Director Stock Option Plan

10.18  -    Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin
                incorporated by reference to Exhibit 10.24 to the Registration
                Statement on Form S-11, File No. 33-71160

10.19  -    Amendment No. 1 to Employment Agreement between Jameson Inns, Inc. and
                Thomas W. Kitchin incorporated by reference to Exhibit 10.15 to
                the Annual Report filed on Form 10-K for the year ended
                December 31, 1995

10.20  -    Amendment No. 2 to Employment Agreement between Jameson Inns, Inc.
                and Thomas W. Kitchin incorporated by reference to Exhibit 10.16
                to the Annual Report filed on Form 10-K for the year ended
                December 31, 1995

10.21  -    Amendment No. 3 to Employment Agreement between Jameson Inns, Inc. and
                Thomas W. Kitchin incorporated by reference to Exhibit 10.46 to
                the Annual Report filed on Form 10-K for the year ended
                December 31, 1996

10.22  -    Indemnification and Hold Harmless Agreement between Jameson Inns,
                Inc. and Jameson Operating Company incorporated by reference to
                Exhibit 10.25 to the Registration Statement on Form S-11, File No.
                33-71160

10.23  -    Indemnification and Hold Harmless Agreement between Jameson Inns,
                Inc. and Kitchin Investments, Inc. incorporated by reference to
                Exhibit 10.26 to the Registration Statement on Form S-11, File No.
                33-71160
</TABLE>


                                      47



<PAGE>   50







<TABLE>
<S>    <C>  <C>                                                                         
10.24  -    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

10.25  -    Construction Loan Agreement, Indenture, Security Agreement and
                Promissory Note dated July 15, 1993 for $1,000,000 loan from
                Empire Financial Services, Inc. to Jameson Inns, Inc. (formerly
                Jameson Company) for construction of Jameson Inn in Carrollton,
                Georgia incorporated by reference to Exhibit 10.39 to the
                Registration Statement on Form S-11, File No. 33-71160

10.26  -    Schedule of documents substantially similar to Exhibit 10.25

10.27  -    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 filed on Form 10-K
                for the year ended December 31, 1993

10.28  -    Deed to Secure Debt, Security Agreement, Assignment of Operating
                Lease, Assignment of Fees and Income, Promissory Note for $1.6
                million loan from Empire Financial Services, Inc. to Jameson Inns,
                Inc. secured by Inn at Jesup, Georgia incorporated by reference to
                Exhibit 10.24 to the Annual Report filed on Form 10-K for the year
                ended December 31, 1995

10.29  -    Schedule of documents substantially similar to Exhibit 10.28.

10.30  -    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 filed on Form 10-K for the year ended
                December 31, 1995
</TABLE>


                                       48



<PAGE>   51





<TABLE>
<S>    <C>  <C>                                                                                     
10.31  -    Schedule of documents substantially similar to Exhibit 10.30.

10.32  -    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 incorporated by reference to Exhibit
                10.3 to the Report filed on Form 10-Q for the quarter ended
                March 31, 1996

10.33  -    Schedule of documents substantially similar to Exhibit 10.32

12.1   -    Ratios of Earnings to Combined Fixed Charges and Preferred Stock
                Dividends

21.1   -    List of subsidiaries of the Company

23.1   -    Consent of Ernst & Young LLP

27.1   -    Financial Data Schedule (for SEC use only)

(b) Reports on Form 8-K
</TABLE>

No reports on Form 8-K were filed during the fourth quarter of the year ended
December 31, 1997.

                                       49


<PAGE>   52




                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Jameson Inns, Inc.

We have audited the accompanying consolidated balance sheets of Jameson Inns,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)2. 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 generally accepted auditing
standards. 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 Jameson
Inns, Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

                                ERNST & YOUNG LLP

Atlanta, Georgia
February 12, 1998

                                                                             F-1


<PAGE>   53



                               JAMESON INNS, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                            1997               1996
                                                       --------------      ------------
<S>                                                    <C>                 <C>         
ASSETS
Property and equipment, at cost                        $ 117,515,375       $ 80,816,228
Less accumulated depreciation                            (12,584,189)        (9,205,591)
                                                       -------------       ------------
                                                         104,931,186         71,610,637

Cash                                                         338,581            208,912
Lease revenue receivable                                   1,457,672            684,625
Prepaid expenses                                               6,280             98,794
Deferred finance costs, net                                  781,472          1,197,205
Other assets                                                  90,505            184,784
                                                       -------------       ------------
                                                       $ 107,605,696       $ 73,984,957

LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable                                 $  29,624,889       $ 22,317,206
Accounts payable and accrued expenses                        213,411             20,121
Accounts payable to affiliates                             2,185,884            633,460
Accrued interest                                             164,757            120,543
Accrued property taxes                                       255,874             97,515
Other accrued liabilities                                         --             33,154
                                                       -------------       ------------
                                                          32,444,815         23,221,999

Stockholders' equity:
  Preferred stock, $1 par value,
      100,000 shares authorized, no shares issued
      and outstanding                                             --                 --

  Common stock, $.10 par value, 20,000,000
     shares authorized, 9,774,075 shares
     (7,357,471 in 1996) issued and outstanding              977,408            735,747
  Additional paid-in capital                              75,210,464         51,054,202
  Retained deficit                                        (1,026,991)        (1,026,991)
                                                       -------------       ------------
Total stockholders' equity                                75,160,881         50,762,958
                                                       -------------       ------------
                                                       $ 107,605,696       $ 73,984,957
                                                       =============       ============
</TABLE>


See accompanying notes.


                                                                             F-2


<PAGE>   54



                               JAMESON INNS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                          1997            1996             1995
                                                      -------------------------------------------
<S>                                                   <C>              <C>             <C>       
Lease revenue                                         $12,966,185      $9,376,101      $6,342,229

Expenses:
    Property tax expense                                  683,902         461,516         292,308
    Insurance expense                                     422,890         271,835         221,647
    Depreciation                                        3,898,091       2,669,574       1,824,569
    General and administrative expenses                   444,908         499,006         621,913
    Loss on disposal of furniture and equipment           143,544          47,849              --
                                                      -----------      ----------      ----------
Total expenses                                          5,593,335       3,949,780       2,960,437
                                                      -----------      ----------      ----------

Income from operations                                  7,372,850       5,426,321       3,381,792
    Interest expense, net of capitalized amounts          777,718       1,385,512       1,590,524
                                                      -----------      ----------      ----------

Income before extraordinary loss                        6,595,132       4,040,809       1,791,268
Extraordinary loss-early extinguishment of debt           689,542         989,376          19,328
                                                      -----------      ----------      ----------

Net income                                              5,905,590       3,051,433       1,771,940
Preferred stock dividends                                      --              --         489,949
                                                      -----------      ----------      ----------

Net income attributable to common stockholders        $ 5,905,590      $3,051,433      $1,281,991
                                                      ===========      ==========      ==========

Per common share:

  Income before extraordinary loss:
    Basic                                             $       .72      $      .65      $      .35
    Diluted                                           $       .70      $      .63      $      .46
  Net income:
    Basic                                             $       .64      $      .49      $      .34
    Diluted                                           $       .63      $      .48      $      .45
</TABLE>


See accompanying notes.

                                                                             F-3


<PAGE>   55



                               JAMESON INNS, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                          $1 Par           $.10 Par                                               Total
                                         Preferred          Common         Contributed         Retained        Stockholders'
                                           Stock             Stock           Capital            Deficit           Equity
                                    ----------------------------------------------------------------------------------------
<S>                                 <C>                 <C>               <C>                <C>               <C>         
Balance at January 1, 1995            $    64,467       $   320,708       $ 23,923,576       $(1,026,991)      $ 23,281,760
   Conversion of preferred stock
     to common stock                      (64,467)           64,467                 --                --                 --
   Issuance of common stock, net
     of offering expense                       --               474             18,682                --             19,156
   Exercise of stock options                   --               146              9,667                --              9,813
   Vesting of stock options                    --                --             76,790                --             76,790
   Preferred stock dividends                   --                --           (489,949)               --           (489,949)
     ($7.60 per share)
   Common stock dividends                      --                --         (1,143,220)       (1,771,940)        (2,915,160)
     ($0.80 per share)
   Net income                                  --                --                 --         1,771,940          1,771,940
                                      -----------       -----------       ------------       -----------       ------------

Balance at December 31, 1995                   --           385,795         22,395,546        (1,026,991)        21,754,350
   Issuance of common stock,
     net of offering expense                   --           339,703         30,787,970                --         31,127,673
   Exercise of stock options                   --             3,770            288,109                --            291,879
   Vesting of stock options                    --                --             63,542                --             63,542
   Restricted stock grant                      --             6,479             28,852                --             35,331
   Common stock dividends                      --                --         (2,509,817)       (3,051,433)        (5,561,250)
     ($0.86 per share)
   Net income                                  --                --                 --         3,051,433          3,051,433
                                      -----------       -----------       ------------       -----------       ------------

Balance at December 31, 1996                   --           735,747         51,054,202        (1,026,991)        50,762,958
   Issuance of common stock,
     net of offering expense                   --           234,549         25,887,675                           26,122,224
   Exercise of stock options                   --             6,981            413,417                              420,398
   Vesting of stock options                    --                --             37,424                               37,424
   Restricted stock grant                      --               131             70,652                               70,783
   Common stock dividends                                                   (2,252,906)       (5,905,590)        (8,158,496)
     ($0.90 per share)                         --                                                                        
   Net income                                  --                --                            5,905,590          5,905,590
                                      -----------       -----------       ------------       -----------       ------------
Balance at December 31, 1997          $        --       $   977,408       $ 75,210,464       $(1,026,991)      $ 75,160,881
                                      ===========       ===========       ============       ===========       ============
                                      
</TABLE>

See accompanying notes.

                                                                             F-4


<PAGE>   56




                               JAMESON INNS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                          1997           1996            1995
                                                     -------------------------------------------
<S>                                                  <C>              <C>             <C>       
OPERATING ACTIVITIES
Net income                                            $ 5,905,590      $ 3,051,433      $ 1,771,940
Adjustments to reconcile net income
  to cash provided by operating activities:
     Extraordinary loss                                   596,526          989,376           19,328
     Depreciation and amortization                      3,977,605        2,762,660        1,911,720
     Loss on disposal of furniture and equipment          143,544           47,849               --
     Stock-based compensation expense                     108,207           98,873           76,790
     Changes in assets and liabilities
       increasing (decreasing) cash:
        Lease revenue receivable                         (773,048)        (188,770)        (147,329)
        Prepaid expenses and other assets                 186,794         (202,130)         (26,628)
        Accounts payable and accrued expenses             193,290          (45,828)          23,882
        Accounts payable to affiliates                  1,552,424           64,799          447,797
        Accrued interest                                   44,214          (30,639)         103,344
        Accrued property taxes and other accrued          125,205           78,857             (156)
       liabilities
                                                      -----------      -----------      -----------
Net cash provided by operating activities              12,060,351        6,626,480        4,180,688

INVESTING ACTIVITIES
Additions to property and equipment                   (37,362,186)     (23,548,156)     (18,844,582)
                                                      -----------      -----------      -----------
Net cash used in investing activities                 (37,362,186)     (23,548,156)     (18,844,582)
</TABLE>



See accompanying notes.

                                                                             F-5


<PAGE>   57



                               JAMESON INNS, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                          1997           1996            1995
                                                     ---------------------------------------------
        <S>                                          <C>              <C>             <C>         
        FINANCING ACTIVITIES
        Common stock dividends paid                   $(8,158,496)    $(5,561,250)    $(2,915,160)
        Preferred stock dividends paid                         --              --        (489,949)
        Proceeds from issuance of common
         stock, net of offering expense                26,122,224      31,127,673          19,156
        Proceeds from exercise of stock options           420,398         291,879           9,813
        Proceeds from mortgage notes payable           33,919,713      27,466,333      22,994,085
        Payment of deferred finance costs                (260,306)     (1,066,270)       (760,430)
        Payments on mortgage notes payable            (26,612,029)    (35,363,031)     (4,309,839)
        Other                                                  --              --          (1,915)
                                                      -----------     -----------     -----------
        Net cash provided by financing activities      25,431,504      16,895,334      14,545,761

        Net increase (decrease) in cash                   129,669         (26,342)       (118,133)
        Cash at beginning of year                         208,912         235,254         353,387
                                                      -----------     -----------     -----------
        Cash at end of year                           $   338,581     $   208,912     $   235,254
                                                      ===========     ===========     ===========

        SUPPLEMENTAL INFORMATION
        Interest paid, net of interest capitalized    $   733,504     $ 1,416,151     $ 1,781,537
                                                      ===========     ===========     ===========
        State income and franchise taxes paid         $    16,752     $     3,772     $     7,355
                                                      ===========     ===========     ===========
</TABLE>



        See accompanying notes.

                                                                             F-6


<PAGE>   58




                               JAMESON INNS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997

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(R)." The
Company focuses on developing Inns in communities in the southeastern United
States which have a strong and growing industrial or commercial base. The
typical Inn is initially built as a 40-unit, two-story, Colonial style Inn on a
one- to two-acre tract with a swimming pool, fitness center and parking areas.
Based on market demand, two Inns were initially constructed with 60 units and
other Inns have been expanded one or more times since their initial
construction. At December 31, 1997, 19 of the operating Inns had 58 or more
rooms each.

At December 31, 1997, there were 62 Inns in operation in Alabama, Georgia,
North Carolina, South Carolina and Tennessee with a total of 2,924 rooms and an
additional 22 Inns under development, including 11 under construction in these
same states and contracts to acquire 11 additional parcels of land on which
additional Inns are expected to be constructed in 1998. The Inns under
development will add 880 rooms. At December 31, 1997, 20-room expansions of two
existing Inns were also being constructed.

Intercompany transactions among the entities included in the consolidated
financial statements have been eliminated. As of December 31, 1997, 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, CEO and
President and his spouse own the remaining 0.2% of these two subsidiaries.

PRIOR OPERATIONS

On December 31, 1993, the Company consummated a series of transactions to remove
all assets not related to ownership of the Inns in contemplation of electing to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes effective January 1, 1994. Effective January 1, 1994, all of the Inns
were leased to Jameson Operating Company under the terms of leases which covered
all of the Inns then owned by the Company and certain affiliated partnerships
previously formed by the Company to construct and own Inns. See Note 3.

In early 1994, the Company consummated an initial public offering of 2,913,000
shares of Common Stock, par value $.10 per share (the "IPO").

The Company's principal business, before and after the IPO, includes
identification of suitable inn locations, arranging construction and permanent
financing, land acquisition, Inn design and configuration, land preparation, and
acquisition of furniture, fixtures and equipment for the Inns. Prior to the IPO,
the Company also constructed the facilities and operated the properties.

                                                                             F-7


<PAGE>   59



                               JAMESON INNS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

PROPERTY AND EQUIPMENT

Costs incurred to acquire and open new Inn locations or to 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 $637,290, $526,130 and $381,508 were capitalized
in 1997, 1996 and 1995, respectively.

Jameson Development Company, L.L.C. ("JDC") and its predecessor, Jameson
Construction Company, construct the Inns for the Company. JDC is managed and
majority-owned by the Company's Chairman and largest stockholder. Jameson
Construction Company was wholly-owned by Kitchin Investments, Inc. Kitchin
Investments, Inc. is wholly-owned by the Company's Chairman and largest
stockholder. The Company paid JDC and its predecessor a total of $29,628,000 and
$18,932,000 for turnkey construction of new Inn construction, expansions,
fitness centers or renovations during the years ended December 31, 1997 and
1996, 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 five years (furniture, fixtures and equipment).

Property and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
                                                         1997             1996
                                                   ------------------------------
        <S>                                        <C>               <C>         
        Land and improvements                      $  21,525,941     $ 14,794,416
        Buildings                                     75,117,503       52,176,321
        Furniture, fixtures and equipment             14,018,665        9,840,922
        Construction in process                        6,853,266        4,004,569
                                                   -------------     ------------
                                                     117,515,375       80,816,228
        Accumulated depreciation                     (12,584,189)      (9,205,591)
                                                   -------------     ------------
                                                   $ 104,931,186     $ 71,610,637
                                                   =============     ============
</TABLE>

In 1996, the Company adopted Financial Accounting Standards Board Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. There was no effect of adoption and no
impairment losses have been recorded.

                                                                             F-8


<PAGE>   60



                               JAMESON INNS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACCOUNTING POLICIES (continued)

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 included in interest expense on the consolidated
statement of operations. Accumulated amortization totaled $88,708 and $50,923 as
of December 31, 1997 and 1996, 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 95% of its 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 which is allocated as part of the cost reimbursement
agreement described in Note 8.

See Note 5 for pro forma disclosures using the fair value method as described in
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation ("FAS 123").

EARNINGS PER SHARE

Earnings per share have been restated for Financial Accounting Standards Board
Statement No. 128, Earnings per Share ("FAS 128") and the Securities and
Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98").

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 Preferred Stock, restricted
shares of Common Stock and outstanding stock options, using the treasury stock
method and the average stock price during the period.

3. THE LEASE

On January 1, 1994, the Company and the partnerships, which owned the Inns prior
to the IPO, entered into leases, whereby all of the operating Inns were leased
to the Jameson Operating Company. Therefore, all of the lease revenue and
related receivables are derived from this lease.

                                                                             F-9


<PAGE>   61



                               JAMESON INNS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. THE LEASE (continued)

After the IPO and the liquidation of the partnerships in January 1994, the
Company entered into a master lease (the "Lease") in substantially the same form
as the individual leases.

Jameson Operating Company was formed in 1993 to conduct the operation of the
Inns and entered into the Lease with the Company for that purpose. Effective
September 12, 1997 and until December 28, 1997, Jameson Operating Company was
wholly owned by Thomas W. Kitchin, Chairman, President and Chief Executive
Officer of the Company. On December 28, 1997, Jameson Operating Company II, LLC
acquired all of the assets, liabilities and operations of Jameson Operating
Company and succeeded Jameson Operating Company as lessee and operator of the
Inns under the Lease. Jameson Operating Company II, LLC is also wholly owned by
Thomas W. Kitchin and his spouse. Jameson Operating Company II, LLC and its
predecessor, Jameson Operating Company, are collectively referred to herein as
"the Operator". The Lease between Jameson Operating Company and Jameson Inns,
Inc. was transferred to Jameson Operating Company II, LLC effective December 28,
1997.

The Lease, which expires December 31, 2007, provides for payment of Base Rent
plus Percentage Rent. Base Rent, which is payable monthly, equals $264.00 per
month for each rentable room in the Inns at the beginning of the relevant month.
Percentage Rent, which is payable quarterly, is calculated as a percentage in
excess of Base Rent of the total amount of room rental and other miscellaneous
revenues realized by the Operator over the relevant period. The percentage is
39% of such revenues up to $21.05 per day per room in 1997 over the period, plus
65% of all additional average daily room rental revenues, provided, however,
that total rent for any calendar year is not to exceed 47% of total room rental
revenues for that year. The $21.05 per room amount used in calculating
Percentage Rent is subject to adjustment each year end based on changes in the
Consumer Price Index and as of January 1, 1998 was $21.62.

Prior to July 1, 1995, when the Lease was amended, the Lease provided for Base
Rent equal to $240.00 per month and Percentage Rent was the same for the first
$20.00 per day but included four different rates for additional average daily
room rental revenues. The Lease amendment also transferred the obligation to
replace or refurbish the furniture, fixtures and equipment in the Inns to the
Company.

Base rent totaled $7,532,712, $5,469,288 and $3,553,252 in 1997, 1996 and 1995,
respectively, and assuming the same number of rooms in operation as at December
31, 1997, would total $9,263,232 per year until the Lease expires.

The Lease requires 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 the Operator, less amounts expended to date, to fund the
Company's future capital expenditures for such replacements and refurbishments.
The Operator is required to pay workers compensation insurance premiums, utility
costs and all other costs and expenses incurred in the operations of the Inns.

                                                                            F-10


<PAGE>   62



                               JAMESON INNS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. MORTGAGE NOTES PAYABLE

As of December 31, long-term debt consists of:

<TABLE>
<CAPTION>
                                                                                        1997            1996
                                                                                    ----------------------------
        Notes payable on Inns:

        <S>                                                                          <C>             <C>
        Terms of seven years, due in monthly installments of
            principal and interest with any remaining unpaid balances
            payable in full on the individual note's maturity date.
            Maturity dates range from 2003 to 2004.  Interest rates are
            adjusted to a specified spread above the prime rate, and
            ranged from 8.5% to 9.0% at December 31, 1997.  Secured
            by mortgages on 16 of the Inns.                                          $ 15,557,415    $13,046,054

        Line of credit:

         $36million line of credit ("the Line") convertible in 1999 to a term
            note due in 2006. At December 31, 1997, the Company had $24.7
            million available to borrow. The Line bears interest at initial
            annual rates ranging from 8.5% to 8.75%, which is adjusted annually
            to the prime rate plus .25% or .5%, with a floor of 7% and a cap of
            13% (8.75% to 9.0% at December 31, 1997). Payments of interest are
            due monthly, and monthly payments of principal and interest commence
            in June 1999. Principal on loans under the Line will be amortized
            using a 15-year period and is payable in
            full in  May 2006.  Secured  by mortgages on 31 of the Inns.               11,286,332      7,122,554

        Construction obligations:

        $7.45 million, including pending draws on construction loans.
             As of December 31, 1997, $4.7 million 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 thereafter until the individual note's
             maturity date. The notes' interest rates are adjusted annually to a
             specified rate above the prime rate or to a specified rate above
             the prime rate with a floor of 7% and a cap of 12% and no annual
             change greater than 1%. Interest rates at December 31, 1997 ranged
             from 8.875% to 9.00%. Secured by seven Inns under
             construction.                                                              2,781,142      2,148,598
                                                                                     ------------    -----------
                                                                                     $ 29,624,889    $22,317,206
                                                                                     ============    ===========
</TABLE>


                                                                            F-11


<PAGE>   63



4. MORTGAGE NOTES PAYABLE (continued)

At December 31, 1997 and 1996, approximately $80.4 and $64.6 million,
respectively, of the Company's net book value of property and equipment
collateralized the mortgage notes payable. At December 31, 1997 and 1996, the
carrying value of the long-term debt approximated its fair value.

The following table summarizes the scheduled aggregate principal payments for
the five years subsequent to December 31, 1997:

<TABLE>
                           <S>                       <C> 
                           1998                      $   469,481
                           1999                        2,065,785
                           2000                        2,929,553
                           2001                        2,922,866
                           2002                        2,567,096
                           Thereafter                 18,670,108
                                                     -----------
                                                     $29,624,889
                                                     ===========
</TABLE>

The Company used proceeds of its common stock offerings in 1997 and 1996 to
early extinguish debt in those years and used proceeds from refinancings to
early extinguish debt in 1995. As a result of the early extinguishment of
certain debt in 1997, 1996 and 1995, the Company had extraordinary losses of
$689,542, $989,376 and $19,328, respectively, comprised of the write-off of
unamortized deferred finance costs and prepayment penalties.

5. STOCKHOLDERS' EQUITY

PREFERRED STOCK

On March 30, 1994, the Board of Directors approved the issuance of 64,467 shares
of preferred stock, $1.00 par value (the "Preferred Stock"), to Thomas W.
Kitchin and the Kitchin Children's Trust in exchange for their 644,669 shares of
the Company's Common Stock. The stock conversion was effected on April 15, 1994
to carry out the provisions of the dividend subordination agreement executed at
the time of the IPO.

The terms of the Preferred Stock provided that each share of Preferred Stock
will have the same voting power as 10 shares of Common Stock and may, at any
time after February 3, 1995, and at the election of the holder thereof, be
converted into 10 shares of Common Stock. The Preferred Stock consisted of two
series, Series A issued to the Kitchin Children's Trust, and Series B issued to
Mr. Kitchin. According to the Preferred Stock terms, after the holders of Common
Stock received dividends of $.76 per share with respect to the period from
February 3, 1994 to February 2, 1995 (the "Subordination Period"), the holder of
the Series A Preferred Stock could receive dividends of up to $7.60 per share
with respect to the Subordination Period and then the holder of the Series B
Preferred Stock could receive dividends up to $7.60 per share. After the holders
of the Common Stock received dividends of $.76 per share and the holders of both
series of the Preferred Stock received dividends of $7.60 per share (which is
equivalent to the $.76 per share dividend on the Common Stock) attributable to
the Subordination Period, all further dividends were to be paid on a pro rata
basis, with each share of Preferred Stock receiving a dividend equal to the
dividend paid on 10 shares of Common Stock.

                                                                            F-12


<PAGE>   64



5. STOCKHOLDERS' EQUITY (continued)

The terms of the Preferred Stock further provided that in the event of the
liquidation, dissolution or winding up of the Corporation, the holders of the
Common Stock will first be entitled to receive liquidating distributions of
$1.00 per share to the extent funds are available for distribution. The holders
of Preferred Stock were then entitled to receive liquidating distributions of
$10.00 per share (which is equivalent to the $1.00 per share distribution on the
Common Stock). All further liquidating distributions were to be paid on a pro
rata basis to the holders of the Common and Preferred Stock, with each share of
Preferred Stock receiving a distribution equal to the distribution paid on 10
shares of Common Stock.

On March 1, 1995, holders of the Preferred Stock converted all of their 64,467
shares of Preferred Stock into 644,670 shares of Common Stock and as a result
there are no outstanding shares of Preferred Stock as of December 31, 1997,
1996, or 1995.

On February 2, 1998, the Company's shareholders approved an increase in the
number of authorized shares of preferred stock to 10 million shares.

COMMON STOCK

On February 2, 1998, the Company's shareholders approved an increase in the
number of authorized shares of Common Stock to 40 million shares.

DIVIDENDS

The Company declared and paid cash dividends to holders of Common Stock equal to
$.90 per share in 1997, $.86 per share in 1996 and $.80 per share in 1995. On
January 22, 1998, the Company declared cash dividends of $0.23 per share of
Common Stock.

On February 6, 1995, the Company also declared and paid a cash dividend of $7.60
per share of Preferred Stock.

STOCK OPTIONS

The Company adopted the 1993 Stock Incentive Plan ("1993 Plan") and originally
reserved 320,000 shares to provide incentives to attract and retain officers,
key employees and directors of both the Company and the Operator. The Company's
1993 Stock Incentive Plan provides for a number of shares equal to 10% of the
Company's outstanding common shares to be available to provide incentives to
retain key personnel at both the Company and the Operator. In 1996, the Jameson
1996 Stock Incentive Plan ("1996 Plan") was adopted and 500,000 shares were
reserved for issuance. As of December 31, 1997 the Company had a total of
1,413,007 shares reserved for future issuance, including 594,010 shares
available for future option grants under the 1993 and 1996 Plans.

In May 1995, the Company reduced the exercise price of the then outstanding
options to purchase a total of 263,500 shares of Common Stock to the then
current market price of $7.25 per share. The options that were repriced
previously had variable exercise prices ranging from $5.50 to $11.00 based on
the amount of dividends the Company paid out for given periods. The vesting
schedule of all the then outstanding options was also changed from five to three
years with one-third vesting on May 4, 1995, one-third on May 4, 1996 and the
remainder on May 4, 1997.

Prior to May 1995, the 1993 Stock Incentive Plan provided that the Company would
grant to each future director an option to purchase 10,000 shares of Common
Stock upon initial election as a Director of the Company. These director options
were fully vested on the date of grant.

                                                                            F-13


<PAGE>   65



 5. STOCKHOLDERS' EQUITY (continued)

The Company adopted the Director Stock Option Plan ("1995 Director Plan") in May
1995 to attract and retain qualified independent directors. This plan provides
for, 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 1995 the three independent directors
surrendered their options to purchase an aggregate of 25,000 shares of Common
Stock under the 1993 Stock Incentive Plan to participate in the 1995 Director
Plan. In addition, the Company adopted the 1997 Director Stock Option Plan
("1997 Director Plan") in November 1997. The 1997 Director Plan provides that at
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, 1997, a total of 325,000
options are reserved for future issuance under the 1995 Director Plan and the
1997 Director Plan, including 235,000 options available to be granted at
December 31, 1997.

A summary of the stock option activity in the 1993, 1996, 1995 Director and 1997
Director Plans follows:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED
                                              NUMBER           RANGE OF           AVERAGE
                                                OF             EXERCISE        EXERCISE PRICE
                                              SHARES        PRICE PER SHARE      PER SHARE
                                            --------------------------------------------------
<S>                                         <C>            <C>       <C>       <C>      
Options outstanding, December 31, 1994       265,000       $  5.50 - $ 11.00             *
    Granted in 1995                          253,000       $  6.65 - $  8.75       $  7.37
    Exercised in 1995                         (1,457)      $  6.65 - $  7.25       $  6.74
    Forfeited in 1995                        (32,003)      $  5.50 - $  7.25             *
    Surrendered in 1995                      (25,000)      $ 7.375 - $  9.00       $  8.21
                                             -------
Options outstanding December 31, 1995        459,540       $  6.65 - $  8.75       $  7.17
    Granted in 1996                           27,500                 $10.875       $10.875
    Exercised in 1996                        (37,697)      $  6.65 - $  7.25       $  7.08
    Forfeited in 1996                        (21,500)      $  6.65 - $  8.75       $  8.27
                                             -------
Options outstanding December 31, 1996        427,843       $  6.65 - $10.875       $  7.36
    Granted in 1997                          497,000       $11.375 - $ 11.75       $ 11.63
    Exercised in 1997                        (86,992)      $  6.65 - $10.875       $  7.11
    Forfeited in 1997                        (30,000)      $  7.25 - $ 11.75       $ 11.28
                                             -------
Options outstanding December 31, 1997        807,851       $  6.65 - $ 11.75       $  9.87
                                             =======
    Exercisable, December 31, 1997           365,855       $  6.65 - $11.625       $  7.78
                                             =======
</TABLE>

* Weighted average not calculated due to variable exercise prices.

The weighted average exercise price of the 807,851 options outstanding at
December 31, 1997 was $9.87. The weighted average exercise price of options
exercisable at December 31, 1997 was $7.78. The average contractual life
remaining on options outstanding at December 31, 1997 was 8.58 years.

                                                                           F-14


<PAGE>   66



5. STOCKHOLDERS' EQUITY (continued)

As presented in the table above, the Company had a total of 807,851 options
outstanding at December 31, 1997. A portion of these options (251,685) have
exercise prices of $6.65 to $7.25, a weighted average exercise price of $7.07
and an average remaining contractual life of 6.54 years. All of the options
outstanding in this group were exercisable with a weighted average price per
share of $7.07. At December 31, 1997, the Company also had 556,166 options
outstanding with an exercise price of $8.125 to $11.75, a weighted average
exercise price of $11.14 and an average remaining contractual life of 9.50
years. Of this outstanding amount, 114,170 options were exercisable with a
weighted average price per share of $9.33.

RESTRICTED STOCK

In 1997 and 1996, the Company awarded 1,400 and 65,270 shares, respectively of
Common Stock to certain officers and employees of the Company and Jameson
Operating Company, under the provisions of the 1996 Plan. The shares vest at the
end of ten years, assuming the individual is continuously employed by one of the
two companies at that date. Total compensation expense of $662,470 is being
recorded over the ten-year vesting period using the straight line method, net of
forfeitures. This original amount represents the fair value of the restricted
shares at the date of grant based on the market price at date of grant; the
expense recorded was $35,331 in 1996 and $62,389 in 1997. As of December 31,
1997, 64,401 shares remain outstanding; the balance were forfeited and returned
to the Company.

PRO FORMA EFFECTS OF STOCK-BASED COMPENSATION

Pro forma information regarding net income and earnings per share is required by
FAS 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
1997, 1996 and 1995; risk-free interest rates of 5.89% to 6.69%; a dividend
yield of 8%; a volatility factor of the expected market price of the Company's
Common Stock of .197 or .208; and an expected life of the option of 3 to 10
years.

During 1996 and 1997, the Company made certain stock-based awards whose exercise
price was less than the then current market price (65,270 and 1,400 shares of
restricted stock were awarded in 1997 and 1996, with a fair value of $5.16 to
$5.37 and $4.26 per share in 1997 and 1996, respectively). All other awards were
made with exercise prices equal to the then current market price.

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.

For purposes of pro forma disclosures, the estimated fair value of the options
and restricted stock is amortized to expense over the vesting period. The
Company's pro forma information follows:

                                                                            F-15


<PAGE>   67




5. STOCKHOLDERS' EQUITY (continued)

<TABLE>
<CAPTION>
                                                                1997         1996         1995
                                                               --------------------------------
<S>                                                            <C>           <C>          <C>   
Pro forma net income (in 000's)                                $5,882       $3,049       $1,764
Pro forma earnings per share - basic                           $  .64       $  .49       $  .34
Pro forma earnings per share - diluted                         $  .62       $  .48       $  .45
</TABLE>


DIVIDEND REINVESTMENT PLAN

In April 1995, the Company registered 200,000 shares of common stock for
purchase under the Dividend Reinvestment and Stock Purchase Plan. The plan
allows existing shareholders to reinvest their dividends in additional shares
purchased at a 5% discount from the average market price of the shares. The plan
also allows existing shareholders to make additional cash purchases of common
stock of up to $5,000 per calendar quarter. These additional cash purchases from
the Company are not sold at a discount from the market price. During 1997 and
1996, 45,483 and 21,331 shares, respectively, were purchased either through
dividend reinvestments or additional cash purchases.

WARRANTS

As a part of its IPO, the Company issued and has warrants outstanding to
purchase up to 260,000 shares of Common Stock at an exercise price of $14.85 per
share; the warrants are exercisable in whole or in part from date of grant until
January 26, 1999.

EMPLOYMENT AGREEMENT

In 1994, the Company's President and Chief Executive Officer entered into an
employment agreement providing for, among other things, an annual salary, stock
appreciation rights ("SARs") based on 150,000 shares of Common Stock and a
non-compete provision. The SARs entitled the president to receive the difference
in the market value of such shares as of the exercise date and $9, the initial
public offering price. In April 1996, the Company and its Chief Executive
Officer and President agreed to amend the Employment Agreement with Mr. Kitchin
to cancel his stock appreciation rights effective March 31, 1996. No amount of
compensation expense has been recorded in the accompanying financial statements
relating to the SARs.

                                                                            F-16


<PAGE>   68




6. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings 
per share:

<TABLE>
<CAPTION>
                                             1997            1996                 1995
                                        --------------------------------------------------
<S>                                     <C>              <C>                  <C>        
Numerator:

Income from continuing operations        $ 6,595,132     $ 4,040,809          $ 1,791,268

Extraordinary loss                          (689,542)       (989,376)             (19,328)
                                         -----------     -----------          -----------
Net income                                 5,905,590       3,051,433            1,771,940

Preferred stock dividends                         --              --             (489,949)
                                         -----------     -----------          -----------

Numerator for basic earnings per
    share  - income available to
    common stockholders                    5,905,590       3,051,433            1,281,991

 Effect of dilutive securities:
   Preferred stock dividends                    --              --                489,949
                                         -----------     -----------          -----------

  Numerator for diluted earnings per
    share - income available to
    common stockholders after
    assumed conversions                  $ 5,905,590     $ 3,051,433          $ 1,771,940
                                         ===========     ===========          ===========

Denominator:

Weighted average shares outstanding        9,285,670       6,239,407            3,749,588

Less: Unvested restricted shares             (63,661)        (61,505)                  --
                                         -----------     -----------          -----------

Denominator for basic earnings per share   9,222,009       6,177,902            3,749,588

Plus:  Effect of dilutive securities

    Convertible preferred stock                   --              --              104,207 

    Employee and director stock options      146,511         129,876               46,876

    Unvested restricted shares                44,999          57,979                   --

Total dilutive potential common shares       191,510         187,855              151,083
                                         -----------     -----------          -----------

Denominator for diluted earnings per
    share-adjusted weighted  average
    shares and assumed conversions         9,413,519       6,365,757            3,900,671
                                         ===========     ===========          ===========
</TABLE>



                                                                            F-17


<PAGE>   69



6. EARNINGS PER SHARE (continued)

<TABLE>
<CAPTION>
                                                   1997     1996       1995
                                                 ----------------------------
<S>                                              <C>        <C>        <C>  
Basic Earnings Per Common Share:

Income before extraordinary loss                  $0.72     $0.65      $0.35

Extraordinary loss                                 (.08)     (.16)      (.01)
                                                  -----     -----      -----

Net income per common share                       $0.64     $0.49      $0.34
                                                  =====     =====      =====

Diluted Earnings Per Common Share:

Income before extraordinary loss                  $0.70     $0.63      $0.46

Extraordinary loss                                 (.07)     (.15)      (.01)
                                                  -----     -----      -----

Net income

                                                  $0.63     $0.48      $0.45
                                                  =====     =====      =====
</TABLE>


For additional disclosures regarding the employee stock options and stock
grants, see Note 5.

Options to purchase 27,500 shares of Common Stock during 1996, warrants to
purchase 260,000 shares of Common Stock during 1997, 1996 and 1995 and stock
appreciation rights to acquire 150,000 shares of Common Stock during 1996 and
1995 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.

7.  INCOME TAXES

The Company recorded no provision for federal income taxes in 1997, 1996 or 1995
due to its REIT status. State tax expense, which is not material, is included in
general and administrative expenses. At December 31, 1997 and 1996, 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 IPO, 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 $.90, $.86 and
$.80 per share in 1997, 1996 and 1995, respectively. Of these dividends, $.73,
$.56 and $.50 per share represents ordinary income and $.17, $.30 and $.30 per
share represents return of capital in 1997, 1996 and 1995, respectively.

8.  ADDITIONAL RELATED PARTY TRANSACTIONS

The Company shares employees and office space with Kitchin Investments, Inc.,
which is wholly owned by the Company's Chairman and largest stockholder. Per the
cost reimbursement agreement, Kitchin Investments, Inc. charged the Company
approximately $220,000, $194,000 and $138,000 for its allocation of salary,
office overhead, and other general and administrative costs in 1997, 1996 and
1995, respectively. Accounts payable to affiliates at December 31, 1997 and 1996
includes $54,251 and $23,053, respectively, due to this related party.

                                                                            F-18


<PAGE>   70



9.  OTHER COMMITMENTS AND CONTINGENCIES

As of December 31, 1997, the Company had executed or expected to execute
construction contracts with Jameson Development Company, LLC for new Inns or
expansions totaling $17.2 million, of which $10.3 million had not been expended.

Subsequent to December 31, 1997 and through January 30, 1998, the Company
purchased sites for three additional new Inns for an aggregate purchase price of
approximately $.9 million. Inn construction costs are estimated to be $4.2
million on these three new sites.

The Company leases its headquarters' office space in Atlanta, Georgia, and land
underlying certain of its Inns which are built or under construction. The leases
require future minimum payments as follows:

<TABLE>
                           <S>             <C>        
                           1998            $   245,893
                           1999                253,773
                           2000                265,903
                           2001                278,518
                           2002                287,595
                           Thereafter        3,278,157
                                           -----------
                                           $ 4,609,839
                                           ===========
</TABLE>


The rent expense under the office lease is paid by Kitchin Investments, Inc. and
is allocated under the cost reimbursement agreement described in Note 8. An
insignificant amount of rent expense is included in general and administrative
expense in the Company's statement of operations.

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 effect on
the Company's financial position or results of operations.

                                                                            F-19


<PAGE>   71



10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                1997 QUARTERS
                                                    --------------------------------------------------------------------
                                                         FIRST              SECOND           THIRD            FOURTH
                                                    --------------------------------------------------------------------
<S>                                                 <C>                <C>              <C>              <C>          
Lease revenue                                       $   2,735,543      $   3,242,524    $   3,554,015    $   3,434,103
Income before extraordinary loss                        1,210,869          1,889,061        2,012,263        1,482,939
Net income                                                521,327          1,889,061        2,012,263        1,482,939
Earnings per common share:
      Income before extraordinary loss:
           Basic                                             0.15               0.20             0.21             0.15
           Diluted                                           0.15               0.19             0.20             0.15
      Net income:
           Basic                                             0.07               0.20             0.21             0.15
           Diluted                                           0.06               0.19             0.20             0.15


<CAPTION>
                                                                                1996 QUARTERS
                                                    --------------------------------------------------------------------
                                                         FIRST              SECOND           THIRD            FOURTH
                                                    --------------------------------------------------------------------
<S>                                                 <C>                <C>              <C>              <C>
Lease revenue                                       $   1,915,590      $   2,427,100    $   2,668,378    $   2,365,033
Income before extraordinary loss                          338,504          1,166,651        1,443,330        1,092,324
Net income                                                338,504            177,275        1,443,330        1,092,324
Earnings per common share:
      Income before extraordinary loss:
           Basic                                             0.09               0.18             0.20             0.15
           Diluted                                           0.08               0.18             0.19             0.15
      Net income:
           Basic                                             0.09               0.03             0.20             0.15
           Diluted                                           0.08               0.03             0.19             0.15
</TABLE>


Quarterly earnings per share do not sum to the annual earnings per share amounts
due to the effects of the timing of stock issuances and fluctuations in average
price during the period.

                                                                            F-20


<PAGE>   72



JAMESON INNS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                 Cost Capitalization
                                                                                    Subsequent to
                                                     Initial Cost                    Acquisition
                                           -----------------------------       ----------------------
                                                              Buildings,                   Buildings,
                            Mortgage                         Equipment &                  Equipment &
Property                        Debt          Land          Improvements          Land    Improvements
--------                 ------------------------------------------------------------------------------- 
<S>                      <C>              <C>               <C>                <C>        <C>

Georgia:

  Albany (f)          $    4,324      $265,344            $ --                 $ 92,308      $1,691,354

  Americus (f)            64,001       131,629              --                  222,297       2,502,845

  Bainbridge (f)         951,000       125,000              --                       --       1,632,280

  Brunswick (f)        1,600,000       175,275              --                       --       1,653,848

  Calhoun (f)            852,000       113,722              --                   18,008       1,564,641

  Carrollton (f)         502,000       225,000              --                   50,029       1,597,633

  Commerce (f)           501,000       304,809              --                    1,299       1,301,318

  Conyers (f)              1,000       301,128              --                       --       1,413,820

  Covingyon (f)           64,001       141,452              --                   22,399       1,295,704

  Douglas (f)              1,000       120,033              --                       --       1,147,714

  Dublin                 875,000            --              --                       --       1,407,441

  Eastman                     --        87,883              --                   13,917       1,356,530

  Fitzgerald                  --       133,515              --                       --       1,084,382

  Greensboro                  --       109,840              --                   17,394       1,441,505

  Hartwell (f)            64,001        85,000              --                   13,460       1,375,615

  Jesup (f)              501,000        89,917              --                   14,239       2,031,577

  LaGrange (f)         1,050,000       200,073              --                       --       1,235,372

  Macon                  624,093       288,518              --                       --       1,380,000

  Milledgeville               --       575,582       4,826,285                       --         233,643

  Oakwood (f)              1,000       258,903              --                       --       1,326,981

  Statesboro (f)          64,001       132,817              --                   21,032       1,404,421

  Thomaston (f)           64,001       157,181              --                   24,890       2,085,551

  Valdosta (f)             2,000       166,632              --                       --       1,609,931

  Warner Robins        1,100,000       365,853              --                       --       2,029,362

  Washington (f)          64,001       107,780              --                   17,067       1,276,787

  Waycross (f)           501,000        87,000              --                   13,777       2,017,114

  Waynesboro (f)           1,000       142,501              --                       --       1,249,089

  Winder (f)              64,001       124,500       1,268,199                       --         644,019


<CAPTION>


                               Gross Amount
                             at Which Carried                                                                                  
                             at Close of Period                                                                         Life on
                         -------------------------                                                           Which Depreciation
                                         Buildings,                                                                   in Latest
                                       Equipment &                 Accumulated        Date         Date of      Income Statement
Property                   Land        Improvements        Total  Depreciation    Acquired    Construction           is Computed
--------             ----------------------------------------------------------------------------------------------------------
<S>                  <C>            <C>             <C>          <C>              <C>         <C>            <C>            

Georgia:

  Albany (f)          $357,652      $1,691,354      $2,049,006      $  198,449      1994             1995                (e)

  Americus (f)         353,926       2,502,845       2,856,771         557,019      1991             1992                (d)

  Bainbridge (f)       125,000       1,632,280       1,757,280         254,911      1994             1994                (e)

  Brunswick (f)        175,275       1,653,848       1,829,123         167,710      1994             1995                (e)

  Calhoun (f)          131,730       1,564,641       1,696,371         366,038      1988             1988                (d)

  Carrollton (f)       275,029       1,597,633       1,872,662         281,764      1993             1994                (e)

  Commerce (f)         306,108       1,301,318       1,607,426          69,193      1996             1996                (e)

  Conyers (f)          301,128       1,413,820       1,714,948          85,340      1996             1996                (e)

  Covingyon (f)        163,851       1,295,704       1,459,555         402,040      1990             1990                (d)

  Douglas (f)          120,033       1,147,714       1,267,747         147,682      1995             1995                (e)

  Dublin                    --       1,407,441       1,407,441          28,486      1997             1997                (e)

  Eastman              101,800       1,356,530       1,458,330         458,544      1989             1989                (d)

  Fitzgerald           133,515       1,084,382       1,217,897         218,321      1993             1994                (e)

  Greensboro           127,234       1,441,505       1,568,739         455,538      1989             1990                (d)

  Hartwell (f)          98,460       1,375,615       1,474,075         338,611      1991             1992                (d)

  Jesup (f)            104,156       2,031,577       2,135,733         592,553      1990             1990                (d)

  LaGrange (f)         200,073       1,235,372       1,435,445          91,659      1995             1996                (e)

  Macon                288,518       1,380,000       1,668,518              --      1997             1997                (e)

  Milledgeville        575,582       5,059,928       5,635,510       1,468,027      1991               --                (d)

  Oakwood (f)          258,903       1,326,981       1,585,884          69,287      1996             1997                (e)

  Statesboro (f)       153,849       1,404,421       1,558,270         514,444      1988             1989                (d)

  Thomaston (f)        182,071       2,085,551       2,267,622         513,164      1990             1990                (d)

  Valdosta (f)         166,632       1,609,931       1,776,563         238,523      1994             1995                (e)

  Warner Robins        365,853       2,029,362       2,395,215          24,785      1997             1997                (e)

  Washington (f)       124,847       1,276,787       1,401,634         410,743      1989             1990                (d)

  Waycross (f)         100,777       2,017,114       2,117,891         384,837      1992             1993                (e)

  Waynesboro (f)       142,501       1,249,089       1,391,590         117,023      1995             1996                (e)

  Winder (f)           124,500       1,912,218       2,036,718         677,743      1988               --                (d)
</TABLE>   




                                                                            F-21


<PAGE>   73


JAMESON INNS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                               Cost Capitalization      
                                                                 Subsequent to          
                                             Initial Cost         Acquisition           
                                         ---------------------  ----------------------- 
                                                    Buildings,          Buildings,      
                            Mortgage             Equipment &            Equipment &     
Property                        Debt     Land   Improvements    Land   Improvements     
--------                 ---------------------------------------------------------------
<S>                      <C>          <C>       <C>            <C>     <C>              

Alabama:

  Albertville (f)        401,000      174,000        --        418      1,077,428

  Alexander City              --      160,086        --         --      1,735,800

  Arab (f)               401,000      131,554        --         --      1,094,081

  Auburn               1,050,000      227,000        --         --      1,366,368

  Decatur (f)            500,000      201,629        --         --      1,305,515

  Eufaula (f)            501,000      228,869        --      3,489      1,204,664

  Florence (f)           401,000      313,579        --      1,202      1,828,179

  Greenville                  --      228,511        --         --      1,280,321

  Jasper               1,050,000      225,633        --         --      1,454,074

  Oxford               1,050,000      307,635        --         --      1,375,355

  Ozark                       --      176,148        --         --      1,148,902

  Selma (f)                1,000      143,812        --     22,773      1,894,872

  Syclacauga           1,100,000      224,476        --         --      1,420,303

  Tuscaloosa                  --           --        --         --      1,442,921


North Carolina:

  Asheboro             1,050,000      278,841        --         --      1,453,161

  Forest City          1,050,000      187,294        --      2,950      1,249,485

  Laurinburg           1,050,000      225,441        --         --      1,230,258

  Sanford              1,050,000      227,030        --     30,826      1,417,342

  Wilson                 921,784      237,712        --         --      1,501,000


South Carolina:

  Anderson (f)            64,001      201,000        --    133,385      1,940,325

  Cheraw                      --      168,458        --         --      1,120,470

  Easley (f)               1,000      266,753        --      2,710      1,108,889

  Gaffney                     --      135,025        --         --      1,602,079

  Georgetown                  --      144,353        --         --      1,439,602

  Greenwood (f)        1,050,000      140,231        --     20,741      1,713,731

  Lancaster                   --      150,592        --         --      1,099,616


<CAPTION>



                          Gross Amount
                        at Which Carried                                                                                  
                        at Close of Period                                                                         Life on
                     ------------------------                                                           Which Depreciation
                                    Buildings,                                                                   in Latest
                                  Equipment &                 Accumulated        Date         Date of      Income Statement
Property              Land        Improvements        Total  Depreciation    Acquired    Construction           is Computed
--------             -------------------------------------------------------------------------------------------------------
<S>                  <C>          <C>             <C>       <C>              <C>         <C>                    <C>  

Alabama:

  Albertville (f)      174,418      1,077,428      1,251,846      183,106      1994          1994               (e)  

  Alexander City       160,086      1,735,800      1,895,886      268,317      1994          1994               (e)  

  Arab (f)             131,554      1,094,081      1,225,635      125,517      1995          1995               (e)  

  Auburn               227,000      1,366,368      1,593,368       25,351      1996          1997               (e)  

  Decatur (f)          201,629      1,305,515      1,507,144      106,506      1995          1996               (e)  

  Eufaula (f)          232,358      1,204,664      1,437,022      112,925      1995          1996               (e)  

  Florence (f)         314,781      1,828,179      2,142,960      141,946      1995          1996               (e)  

  Greenville           228,511      1,280,321      1,508,832       67,069      1996          1996               (e)  

  Jasper               225,633      1,454,074      1,679,707       13,269      1997          1997               (e)  

  Oxford               307,635      1,375,355      1,682,990       42,398      1996          1997               (e)  

  Ozark                176,148      1,148,902      1,325,050      174,451      1994          1995               (e)  

  Selma (f)            166,585      1,894,872      2,061,457      403,702      1991          1992               (d)  

  Syclacauga           224,476      1,420,303      1,644,779       19,500      1997          1997               (e)  

  Tuscaloosa                --      1,442,921      1,442,921       21,560      1996          1997               (e)  


North Carolina:    

  Asheboro             278,841      1,453,161      1,732,002       13,537      1997          1997               (e)  

  Forest City          190,244      1,249,485      1,439,729       59,805      1996          1997               (e)  

  Laurinburg           225,441      1,230,258      1,455,699       44,174      1996          1997               (e)  

  Sanford              257,856      1,417,342      1,675,198       19,576      1996          1997               (e)  

  Wilson               237,712      1,501,000      1,738,712           --      1996          1997               (e)  


South Carolina:

  Anderson (f)         334,385      1,940,325      2,274,710      369,473      1993          1993               (e)  

  Cheraw               168,458      1,120,470      1,288,928      134,767      1995          1995               (e)  

  Easley (f)           269,463      1,108,889      1,378,352      155,077      1994          1995               (e)  

  Gaffney              135,025      1,602,079      1,737,104      142,498      1995          1995               (e)  

  Georgetown           144,353      1,439,602      1,583,955       75,839      1996          1996               (e)  

  Greenwood (f)        160,972      1,713,731      1,874,703      161,519      1994          1995               (e)  

  Lancaster            150,592      1,099,616      1,250,208      146,831      1994          1995               (e)  
</TABLE>    



                                                                            F-22


<PAGE>   74
JAMESON INNS, INC.           
                                                             
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION      
AS OF DECEMBER 31, 1997                                      
                                                             
                                                             
<TABLE>                                                          
<CAPTION>                             
                                                                                 Cost Capitalization              Gross Amount     
                                                                                   Subsequent to                at Which Carried   
                                                            Initial Cost            Acquisition                 at Close of Period 
                                                  -------------------------   --------------------------      -------------------- 
                                                                Buildings,                   Buildings,                 Buildings, 
                                    Mortgage                    Equipment &                  Equipment &                Equipment &
Property                            Debt          Land         Improvements       Land     Improvements       Land    Improvements 
--------                          ------------------------------------------------------------------------------------------------ 
<S>                               <C>            <C>           <C>            <C>          <C>               <C>      <C>          
South Carolina:                                                                                                                    
                                                                                                                                   
  Orangeburg                               --        165,010            --         585      1,161,406        165,595     1,161,406 
                                                                                                                                   
  Seneca                                   --        204,385            --          --      1,225,401        204,385     1,225,401 
                                                                                                                                   
  Simpsonville (f)                  1,050,000        229,205            --          --      1,275,879        229,205     1,275,879 
                                                                                                                                   
  Union                                    --        178,006            --         746      1,256,960        178,752     1,256,960 
                                                                                                                                   
                                                                                                                                   
Tennessee:                                                                                                                         
                                                                                                                                   
  Clinton                           1,100,000        244,514            --          --      1,431,001        244,514     1,431,001 
                                                                                                                                   
  Decherd                             931,890        254,501            --          --      1,303,600        254,501     1,303,600 
                                                                                                                                   
  Johnson City                        670,457        405,939            --          --      2,130,000        405,939     2,130,000 
                                                                                                                                   
  Tullahoma                           884,191        303,536            --          --      1,300,058        303,536     1,300,058 
                                                                                                                                   
                                                                                                                                   
Construction or development in                                                                                                     
progress:                                                                                                                          
                                                                                                                                   
  Cleveland, TN                            --        384,688            --          --         22,770        384,688        22,770 
                                                                                                                                   
  Duncan, SC                          304,519        212,246            --          --        536,371        212,246       536,371 
                                                                                                                                   
  Dunn, NC                            522,522        202,052            --          --      1,387,081        202,052     1,387,081 
                                                                                                                                   
  Eden, NC                                 --        197,468            --          --         54,404        197,468        54,404 
                                                                                                                                   
  Forest City, NC - Expansion              --             --            --          --        417,301             --       417,301 
                                                                                                                                   
  Kingsland, GA                       155,611        283,432            --          --        378,457        283,432       378,457 
                                                                                                                                   
  LaGrange, GA - Expansion                 --             --            --          --        421,384             --       421,384 
                                                                                                                                   
  Lenoir, NC                          257,168        360,923            --          --        352,128        360,923       352,128 
                                                                                                                                   
  Perry, GA                           543,362        238,325            --          --      1,315,021        238,325     1,315,021 
                                                                                                                                   
  Roanoke Rapids, NC                       --        320,014            --          --         30,491        320,014        30,491 
                                                                                                                                   
  Smithfield, NC                      428,379        246,092            --          --        625,912        246,092       625,912 
                                                                                                                                   
  Spartanburg, SC                     569,581        247,838            --          --      1,236,668        247,838     1,236,668 
                                                                                                                                   
  Trussville, AL                           --        425,438            --          --         75,278        425,438        75,278 
                                  ------------------------------------------------------------------------------------------------ 
                                                                                                                                   
                                                                                                                                   
Totals                            $29,624,889    $15,226,161    $6,094,484    $761,941    $95,432,789    $15,988,102  $101,527,273 
                                  ================================================================================================ 
</TABLE>   

           
           
           
           
<TABLE>    
<CAPTION>  
                                                                                                                                   
                                                                                                                                   
                                                                                                      Life on                      
                                                                                           Which Depreciation                      
                                                                                                    in Latest                      
                                                     Accumulated      Date      Date of      Income Statement                      
Property                                Total       Depreciation    Acquired  Construction        is Computed                      
--------                                ---------------------------------------------------------------------                      
<S>                                     <C>        <C>              <C>       <C>          <C>                                     
South Carolina:                                                                                                                    
                                                                                                                                   
  Orangeburg                             1,327,001     125,003           1995        1995               (e)                        
                                                                                                                                   
  Seneca                                 1,429,786      64,893           1996        1996               (e)                        
                                                                                                                                   
  Simpsonville (f)                       1,505,084      76,544           1996        1996               (e)                        
                                                                                                                                   
  Union                                  1,435,712      60,467           1996        1997               (e)                        
                                                                                                                                   
                                                                                                                                   
Tennessee:                                                                                                                         
                                                                                                                                   
  Clinton                                1,675,515      20,067           1997        1997               (e)                        
                                                                                                                                   
  Decherd                                1,558,101      41,066           1996        1997               (e)                        
                                                                                                                                   
  Johnson City                           2,535,939          --           1997        1997               (e)                        
                                                                                                                                   
  Tullahoma                              1,603,594      35,002           1996        1997               (e)                        
                                                                                                                                   
                                                                                                                                   
Construction or development in                                                                                                     
progress:                                                                                                                          
                                                                                                                                   
  Cleveland, TN                            407,458          --                                                                     
                                                                                                                                   
  Duncan, SC                               748,617          --                                                                     
                                                                                                                                   
  Dunn, NC                               1,589,133          --                                                                     
                                                                                                                                   
  Eden, NC                                 251,872          --                                                                     
                                                                                                                                   
  Forest City, NC - Expansion              417,301          --                                                                     
                                                                                                                                   
  Kingsland, GA                            661,889          --                                                                     
                                                                                                                                   
  LaGrange, GA - Expansion                 421,384          --                                                                     
                                                                                                                                   
  Lenoir, NC                               713,051          --                                                                     
                                                                                                                                   
  Perry, GA                              1,553,346          --                                                                     
                                                                                                                                   
  Roanoke Rapids, NC                       350,505          --                                                                     
                                                                                                                                   
  Smithfield, NC                           872,004          --                                                                     
                                                                                                                                   
  Spartanburg, SC                        1,484,506          --                                                                     
                                                                                                                                   
  Trussville, AL                           500,716          --                                                                     
                                  ----------------------------------------------------------------------------------------         
                                                                                                                                   
Totals                                $117,515,375 $12,584,189                                                                     
                                  ========================================================================================         
</TABLE>   
           
                                                                            F-23

<PAGE>   75
 


                               JAMESON INNS, INC.

                              NOTES TO SCHEDULE III

<TABLE>
<CAPTION>
                                                           1997              1996              1995
                                                 -------------------------------------------------------
<S>                                                   <C>                 <C>                <C>        
        (a)   Reconciliation of real estate:

Balance at beginning of year                          $  80,816,228       $ 57,369,657       $38,525,075
   Additions during year:
       Improvements                                      37,373,593         23,548,156        18,844,582
       Deletions                                           (674,446)          (101,585)               --
                                                      -------------       ------------       -----------
Balance at end of year                                $ 117,515,375       $ 80,816,228       $57,369,657
                                                      =============       ============       ===========

(b)  Reconciliation of accumulated depreciation:

Balance at beginning of year                          $   9,205,591       $  6,589,753       $ 4,765,184
   Depreciation for the year                              3,898,091          2,669,574         1,824,569
   Retirements                                             (519,493)           (53,736)               --
                                                      -------------       ------------       -----------
Balance at end of year                                $  12,584,189       $  9,205,591       $ 6,589,753
                                                      =============       ============       ===========

(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                    5 years

(f) This Inn is one of 31 Inns securing the Company's $36 million line of credit. Amount of debt 
listed as outstanding is an allocation.
</TABLE>

                                                                            F-24


<PAGE>   76





                         REPORT OF INDEPENDENT AUDITORS

The Members
Jameson Operating Company II, LLC

We have audited the accompanying balance sheets of Jameson Operating Company II,
LLC and its predecessor Jameson Operating Company (collectively the "Company")
as of December 31, 1997 and 1996, and the related statements of operations,
members' capital and stockholders' deficit, and cash flows for each of the three
years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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 financial position of Jameson Operating Company II,
LLC and its predecessor at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.


                                ERNST & YOUNG LLP

Atlanta, Georgia
February 12, 1998

                                                                            F-25


<PAGE>   77





                        JAMESON OPERATING COMPANY II, LLC

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      DECEMBER 31
                                                                  1997            1996
                                                            -----------------------------
<S>                                                         <C>               <C>        
ASSETS
  Current Assets:
    Cash                                                      $  592,533      $   170,410
    Accounts receivable                                          567,025          431,593
    Accounts receivable from affiliates                          340,317          399,202
    Prepaid advertising                                          145,766             --
    Prepaid expenses                                              46,362           53,592
    Inventory                                                    478,789          332,848
    Note receivable                                                1,337            8,976
                                                              ----------      -----------
                                                               2,172,129        1,396,621
  Leasehold improvements, net                                     71,277          127,419
  Intangibles, net                                                22,500           23,125
                                                              ----------      -----------
                                                              $2,265,906      $ 1,547,165
                                                              ==========      ===========

LIABILITIES, MEMBERS' CAPITAL  AND STOCKHOLDERS' DEFICIT

  Current Liabilities:
    Accounts payable                                          $  181,996      $   262,825
    Lease expense payable                                      1,457,671          684,625
    Accounts payable to affiliates                                 2,795          478,779
    Accrued liabilities                                          315,095          196,060
    Notes payable                                                     --           13,407
                                                              ----------      -----------
                                                               1,957,557        1,635,696

MEMBERS' CAPITAL AND STOCKHOLDERS' DEFICIT:
  Members' Capital                                               308,349               --
  Common stock, $1 par value, 500 shares
     authorized, issued and outstanding                               --              500
  Contributed capital                                                 --          349,465
  Accumulated deficit                                                 --         (438,496)
                                                              ----------      -----------
Total members' capital and stockholders' deficit                 308,349          (88,531)
                                                              ----------      -----------
                                                              $2,265,906      $ 1,547,165
                                                              ==========      ===========
</TABLE>

See accompanying notes.

                                                                            F-26


<PAGE>   78




                        JAMESON OPERATING COMPANY II, LLC

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31
                                         1997              1996                1995
                                    -------------------------------------------------
<S>                                 <C>               <C>                <C>         
Revenues:
  Room revenues                      $26,937,065      $ 19,449,805       $ 12,960,149
  Telephone revenues                     604,467           462,871            320,274
  Other sales                             46,096            37,375             29,639
                                     -----------      ------------       ------------
                                      27,587,628        19,950,051         13,310,062

Expenses:
  Lease expense                       12,966,185         9,376,101          6,342,229
  Room expenses                        5,832,763         4,075,203          2,781,385
  Utilities                            2,239,474         1,748,706          1,158,609
  General and administrative           1,995,225         1,655,301          1,029,181
  Inn manager salaries                 1,865,181         1,247,514            801,317
  Maintenance                            815,189           599,545            455,530
  Advertising                            979,010           648,065            388,801
  Insurance                              115,454           145,063            125,240
  Management fee                         472,500           478,801            261,666
  Interest                                    --             3,391              8,580
  Depreciation and amortization           56,767            65,048             50,569
                                     -----------      ------------       ------------
    Total expenses                    27,337,748        20,042,738         13,403,107
                                     -----------      ------------       ------------

Net income (loss)                    $   249,880      $    (92,687)      $    (93,045)
                                     ===========      ============       ============
</TABLE>



See accompanying notes.

                                                                            F-27


<PAGE>   79




                        JAMESON OPERATING COMPANY II, LLC

            STATEMENTS OF MEMBERS' CAPITAL AND STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                     $1 PAR                    ACCUMULATED       TOTAL
                                  MEMBERS            COMMON      CONTRIBUTED     (DEFICIT)    STOCKHOLDERS'
                                  CAPITAL            STOCK         CAPITAL        CAPITAL    (DEFICIT)EQUITY
                                 ---------------------------------------------------------------------------
<S>                              <C>             <C>             <C>           <C>           <C>       
 Balance at January 1, 1995        $     --      $     500       $ 123,250       $(252,764)      $(129,014)
   Capital contribution                  --             --         102,784              --         102,784
   Net loss                              --             --              --         (93,045)        (93,045)
                                   --------      ---------       ---------       ---------       ---------
 Balance at December 31, 1995            --            500         226,034        (345,809)       (119,275)
   Capital contribution                  --             --         123,431              --         123,431
   Net loss                              --             --              --         (92,687)        (92,687)
                                   --------      ---------       ---------       ---------       ---------
 Balance at December 31, 1996            --            500         349,465        (438,496)        (88,531)
   Net income                            --             --              --         249,880         249,880
   Recapitalization of
   Company as limited
   liability company                161,349           (500)       (349,465)        188,616        (161,349)
  Members' Contribution             147,000             --              --              --              --
                                   --------      ---------       ---------       ---------       ---------
 Balance at December 31, 1997      $308,349      $      --       $      --       $      --       $      --
                                   --------      ---------       ---------       ---------       ---------
</TABLE>




 See accompanying notes.

                                                                            F-28

<PAGE>   80
                        JAMESON OPERATING COMPANY II, LLC

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31
                                                1997          1996        1995
                                             -------------------------------------
<S>                                          <C>           <C>           <C>       
OPERATING ACTIVITIES
Net income (loss)                            $ 249,880     $ (92,687)    $ (93,045)
Adjustment to reconcile net income (loss)
to net cash provided by operating
activities:

    Depreciation and amortization               56,767        65,048        50,569
    Bad debt expense                            46,124        10,440        16,361
    Changes in assets and liabilities
    Increasing
      (decreasing) cash:

      Accounts receivable                     (181,556)     (130,955)      (77,321)
      Accounts receivable from affiliate        58,885      (171,378)     (182,423)
      Prepaid advertising                     (145,766)         --            --
      Prepaid expenses                           7,230        (9,393)        3,597
      Inventory                               (145,941)         --            --
      Note receivable                            7,639           681        (9,657)
      Accounts payable                         (80,829)       40,826       (27,015)
      Lease expense payable                    773,046       188,770       147,329
      Accounts payable to affiliate           (475,984)      238,972        66,849
      Accrued liabilities                      119,035        18,163       142,110
                                             -------------------------------------
Net cash provided by operating activities      288,530       158,487        37,354

INVESTING ACTIVITIES
Purchase of leasehold improvements                --            --        (121,224)
Sale of vehicle                                   --            --           8,627
                                             -------------------------------------
Net cash used in investing activities             --            --        (112,597)

FINANCING ACTIVITIES
Contribution from members                      147,000          --            --
Proceeds from notes payable                       --          25,045          --
Payments on notes payable                      (13,407)      (57,999)      (51,038)

                                             -------------------------------------
Net cash provided by (used in)
     financing activities                      133,593       (32,954)      (51,038)
Net increase (decrease) in cash                422,123       125,533      (126,281)
Cash at beginning of year                      170,410        44,877       171,158
                                             -------------------------------------
Cash at end of year                          $ 592,533     $ 170,410     $  44,877
                                             =====================================

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the year                $   1,184     $   4,492     $   9,121
                                             =====================================

</TABLE>


                             See accompanying notes.

                                                                            F-29


<PAGE>   81


                        JAMESON OPERATING COMPANY II, LLC

                        NOTES TO FINANCIAL STATEMENTS

1.  BUSINESS AND BASIS OF FINANCIAL STATEMENTS

Jameson Operating Company II, LLC was formed October 29, 1997 and its members
consist of Thomas W. Kitchin and his spouse. On December 28, 1997, Jameson
Operating Company II, LLC acquired all the assets and assumed the liabilities of
Jameson Operating Company, and succeeded Jameson Operating Company as lessee and
operator of the Inns under the lease with Jameson Inns, Inc. (see Note 3).
Jameson Operating Company II, LLC and Jameson Operating Company are collectively
referred to herein as the "Operator". As both Jameson Operating Company II, LLC
and Jameson Operating Company were under common control of Thomas W. Kitchin and
his spouse at the time of the acquisition the financial statements present the
financial position, results of operations and cash flows of both Jameson
Operating Company II, LLC and its predecessor Jameson Operating Company. This
sale has been accounted for similar to a pooling of interests due to the common
ownership and control of both companies.

The members have no liability for any debt, obligations, or liabilities of the
Operator (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.

Jameson Operating Company was formed in October 1993 as a wholly owned
subsidiary of Jameson Inns, Inc. ("Jameson" or "the REIT") although it had no
operations until January 1, 1994. On December 31, 1993, Jameson consummated a
series of transactions to divest itself of all assets not related to ownership
of its limited service hotels (the "Inns") in contemplation of its initial
public offering of common stock and electing to qualify as a real estate
investment trust ("REIT") for federal income tax purposes effective January 1,
1994. On December 31, 1993, Jameson sold all of the common stock of the Operator
to its Chairman, President and largest stockholder and to a trust of which its
General Counsel/Secretary is the trustee and beneficiary. Effective January 1,
1994, the Operator began leasing the Inns from the REIT and from the
partnerships which owned the Inns prior to the REIT's initial public offering
("IPO"), until the REIT acquired the interests of the partnerships in February
1994. Prior to 1994, the Operator's results of operations were included in the
consolidated financial statements of Jameson Inns, Inc. Effective September 12,
1997 and until December 28, 1997, Jameson Operating Company was wholly owned by
its Chairman and President.

The Operator operates and controls advertising for the Inn properties using the
trademark "The Jameson Inn." At December 31, 1997 and 1996, the Operator leased
62 Inns (2,924 rooms) and 43 Inns (2,107 rooms), respectively, in Alabama,
Georgia, North Carolina, South Carolina and Tennessee.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

INVENTORY

Inventory, consisting of room linens and towels, is stated at the lower of fair
value at date of purchase or contribution (see Note 6), cost (first-in,
first-out method) or market. Replacements of inventory are expensed.

LEASEHOLD IMPROVEMENTS

Leasehold improvements relate to improvements made to the Inns prior to July 1,
1995 when this responsibility was transferred to the REIT. Leasehold
improvements, which are stated at cost, are being amortized using the
straight-line method over their estimated useful lives ranging from three to ten
years,

                                                                            F-30


<PAGE>   82




2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

not to exceed the remaining term of the lease (see Note 3). Accumulated
depreciation totaled $184,895 and $128,753 as of December 31, 1997 and 1996,
respectively.

The Operator follows FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.

INTANGIBLES

Intangibles consist of the registered trademark, "The Jameson Inn." The lease
described in Note 3 requires the Operator to operate the Inns using the
trademark and not to use the trademark (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 the
trademark from the Operator 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. The
trademark is being amortized over 40 years. Accumulated amortization totaled
$2,500 and $1,875 as of December 31, 1997 and 1996, respectively.

INCOME TAXES

Jameson Operating Company II, LLC has elected to be treated as a partnership for
federal and state income tax purposes. Accordingly the members are to report
their proportionate share of Jameson Operating Company II, LLC's taxable income
or loss in their respective tax returns; therefore no provision for income taxes
has been included in the accompanying 1997 financial statements related to the
operations of Jameson Operating Company II, LLC.

Jameson Operating Company used the liability method of accounting for income
taxes. See Note 4 for a further discussion of income taxes related to Jameson
Operating Company.

ADVERTISING

During 1997 the Operator contracted with an advertising agency for the
production and broadcast or printing of various radio, newspaper and television
ads for the Inns. As of December 31, 1997, approximately $146,000 of costs have
been incurred related to the production of ads that began to be broadcast or
printed in January, 1998. These costs have been capitalized and are included in
the accompanying balance sheet. The Operator expenses advertising upon first
showing.

3.  THE LEASE

On January 1, 1994, the REIT and the partnerships, which owned the Inns prior to
the REIT's IPO, entered into individual leases whereby all of the operating Inns
were leased to the Operator. After the REIT's IPO in early 1994 and the
liquidation of the partnerships in January 1994, the Operator and the

REIT entered into a master lease (the "Lease") in substantially the same form as
the individual leases. Beginning January 1, 1994 all of the operating Inns are
leased to the Operator 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 Lease expires December 31, 2007 and provides for payment of Base Rent plus
Percentage Rent. Base Rent, which is payable monthly, equals $264.00 per month
for each rentable room in the Inns at the beginning of the relevant month.
Percentage Rent, which is payable quarterly, is calculated as a percentage in
excess of Base Rent of the total amount of room rental and other miscellaneous
revenues ("Room Revenues") realized by the Operator over the relevant period.


                                                                            F-31


<PAGE>   83



3.  THE LEASE (CONTINUED)

The percentage is 39% of such revenues up to $21.05 per day per room over the
period, 65% of all additional average daily room rental revenues, provided,
however, that total rent for any calendar year is limited to 47% of total room
rental revenues for that year. The $21.05 per room amount used in calculating
Percentage Rent is subject to adjustment each year end, based on changes in the
Consumer Price Index, and as of January 1, 1998 was $21.62. Prior to July 1,
1995 when the Lease was amended, the Lease provided for Base Rent equal to
$240.00 per month and Percentage Rent was the same for the first $20.00 per day
but included four different rates for additional average daily room rental
revenues.

In 1995, the Lease amendment also transferred the obligation to replace or
refurbish the furniture, fixtures and equipment in the Inns from the Operator to
the REIT.

Base Rent totaled $7,532,712, $5,469,288 and $3,553,252 in 1997, 1996 and 1995,
respectively, and assuming the same number of rooms in operation as of December
31, 1997, would total $9,263,232 per year until the Lease expires.

The Lease requires the REIT to pay real and personal property taxes, casualty
and liability insurance premiums and the cost of maintaining structural
elements, including underground utilities and effective July 1, 1995, the cost
of replacing or refurbishing the furniture, fixtures and equipment in the Inns.
Prior to July 1, 1995, the Operator was responsible for the cost of replacing or
refurbishing furniture, fixtures and equipment and hence recorded these costs as
leasehold improvements. The Operator is required to pay workers compensation
insurance premiums, utility costs and all other costs and expenses incurred in
the operation of the Inns.

Under the Lease, the REIT is required to maintain the structural elements of
each Inn. The Operator is required, at its expense, to maintain the Inns
(exclusive of furniture, fixtures and equipment) in good order and repair and to
make non-structural, foreseen and unforeseen, and ordinary and extraordinary
repairs which may be necessary and appropriate and 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 lease.

The Operator has agreed that neither it nor any of its affiliates will (i)
operate or manage a hotel property in which the REIT has not invested that is
within a 20-mile radius of an Inn, or (ii) own or have any interest in any hotel
property in which the REIT or an affiliate does not have an interest.

4.  INCOME TAXES

Jameson Operating Company recorded no provision for income taxes in 1997, 1996
and 1995 due to losses incurred or utilization of its net operating loss carry
forward. Jameson Operating Company ceased to exist on December 28, 1997 due to
its acquisition by Jameson Operating Company II, LLC and accordingly all net
operating loss carryforwards were utilized or forfeited during 1997.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Jameson Operating Company deferred tax assets and liabilities are as follows:

                                                                            F-32


<PAGE>   84



4.  INCOME TAXES (continued)

<TABLE>
<CAPTION>
                                               DECEMBER 31
                                                  1996
                                               -----------
<S>                                            <C>
Deferred Tax Liabilities:

Depreciation and Amortization                  $   2,400
Inventory                                        133,100
                                               ---------
Total Deferred Tax Liabilities                   135,500
Deferred Tax Assets:
Net Operating Loss Carryforwards                 166,700
                                               ---------
Total Deferred Tax Assets                        166,700
Valuation Allowance for Deferred Tax Assets      (31,200)
                                               ---------
Net Deferred Tax Assets                          135,500
                                               ---------
Net Deferred Tax Assets and Liabilities        $      --
                                               =========
</TABLE>

The valuation allowance decreased approximately $31,200 during the year ended
December 31, 1997 and there are no deferred taxes at December 31, 1997 due to
the limited liability company status.

5.  NOTES PAYABLE

Notes payable consisted of the following:

<TABLE>
<CAPTION>
                                                                                         1997            1996
                                                                                         -----------------------
<S>                                                                                      <C>             <C>    
     At December 31, 1996, one unsecured note payable maturing June 7, 1998 and
three unsecured lines of credit with terms of one year. The unsecured note
payable was repaid in 1997 and the lines of credit were not renewed. Three of
the notes had fixed interest rates ranging from 9.75% to 10.25% at December 31,
1996. One note had a variable interest rate of prime plus 1% (10% at 
December 31, 1996).                                                                       $   --         $13,407
                                                                                         =======================
</TABLE>


The lines of credit were guaranteed by the Operator's Chairman, President, Chief
Executive Officer and member.

6.  RELATED PARTY TRANSACTIONS

The Operator has a Cost Reimbursement Agreement with Kitchin Investments (a
company wholly owned by the Operator's Chairman, President, Chief Executive
Officer and majority member) whereby the Operator 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. The agreement was amended effective January 1, 1996, to limit the
reimbursement to a maximum of 2.4% of the Operator's total revenues, resulting
in a reduction of $264,000 in general and administrative costs in 1996 as
compared to its allocated share. The Cost Reimbursement Agreement expires on
December 31, 1999. Kitchin Investments, Inc. charged the

                                                                            F-33


<PAGE>   85



6.  RELATED PARTY TRANSACTIONS (continued)

Operator $472,500, $478,801 and $261,666 in 1997, 1996 and 1995, respectively,
pursuant to the Cost Reimbursement Agreement.

The Operator also leases space on outdoor billboards for periods of one to ten
years from Jameson Outdoor Advertising Company, LLC and its predecessor (both
companies are majority owned by the Operator's Chairman, President, Chief
Executive Officer and majority member). During 1997, 1996 and 1995, such expense
totaled $405,047, $314,030 and $174,200, respectively, and is reflected as
advertising expense in the accompanying statements of operations. As of December
31, 1997, the leases require future minimum payments as follows:

<TABLE>
<CAPTION>
      Year ending December 31,
      <S>                                                 <C>       
             1998                                         $  449,919
             1999                                            449,919
             2000                                            449,919
             2001                                            449,919
             2002                                            449,919
          Thereafter                                       1,691,985
                                                          ----------
                                                          $3,941,580
                                                          ==========
</TABLE>

In addition, Jameson Development Company, LLC ("JDC") and its predecessor,
Jameson Construction Company, coordinate services for certain repair and
maintenance activities on the Inns, for which the Operator is not charged. Both
companies are majority owned by the Operator's Chairman, President, Chief
Executive Officer and majority member. Invoices received for such repairs and
maintenance, which are performed by third parties, are paid by the Operator.

The Lease between the REIT and the Operator requires the Operator to provide the
room linens and towels and subsequent replacements. In 1996 and prior, JDC or
its predecessor provided the Operator with the initial inventory for each Inn at
no charge. The Operator recorded this inventory at JDC's cost and credited this
amount against additional contributed capital due to common ownership of both
companies. Such amounts totaled approximately $123,000 and $103,000 in 1996 and
1995, respectively. In 1997, the Operator purchased the inventory from JDC at
JDC's cost of approximately $146,000.

In 1997, JDC retained the services of the Operator and its employees to provide
certain pre-opening activities related to Inns under construction. JDC paid the
Operator approximately $283,000 in 1997 for these services, based on the payroll
cost of the Operator's employees, who provided such services.

7.  COMMITMENTS AND CONTINGENCIES

From time to time, the Operator 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
Operator's financial position or results of operations.


8. YEAR 2000 (UNAUDITED)

Based on recent assessments, the Operator believes its software is Year 2000
compliant.



                                                                            F-34

<PAGE>   86
                                   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.


                                       Jameson Inns, Inc.
                                       Registrant

Dated: February 20, 1998

                                       By: /s/ Thomas W. Kitchin
                                           -------------------------------------
                                           Thomas W. Kitchin
                                           President and Chief Executive Officer

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

<TABLE>
<CAPTION>
SIGNATURE                                   CAPACITY                                    DATE
---------                                   --------                                    ----
<S>                                         <C>                                         <C>
PRINCIPAL EXECUTIVE OFFICER:               
                                           
                                            Chairman of the Board
                                            President, Chief Executive
/s/ Thomas W. Kitchin                       Officer, and Director                       February 20, 1998
------------------------                   
Thomas W. Kitchin                          
                                           
                                           
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
                                           
                                            Vice President-Finance
                                            Chief Financial Officer,
/s/ Craig R. Kitchin                        and Treasurer                               February 20, 1988
------------------------                   
Craig R. Kitchin                           
                                           
                                           
ADDITIONAL DIRECTORS:                      
                                           
/s/ Robert D. Hisrich                       Director                                    February 20, 1998
------------------------                   
Robert D. Hisrich                          
                                           
/s/ Thomas J. O'Haren                       Director                                    February 20, 1998
------------------------                   
Thomas J. O'Haren                          
                                           
/s/ Michael E. Lawrence                     Director                                    February 20, 1998
------------------------                   
Michael E. Lawrence                        
</TABLE>

<PAGE>   87



                                Index to Exhibits


<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S>       <C>   <C>
3.1       -     Articles of Incorporation of the Registrant incorporated by reference to Exhibit 3.1.1 to
                        the Registration Statement filed on Form S-11, File No. 33-71160

3.2       -     Articles of Amendment to the Articles of Incorporation of the Registrant incorporated
                        by reference to Exhibit 3.1.2 to the Registration Statement filed on Form S-11,
                        File No. 33-71160

3.3       -     Articles of Amendment to the Articles of Incorporation of the Registrant Setting forth
                        the Designation of Preferences, Rights, Privileges and Restrictions of Preferred
                        Stock Registrant incorporated by reference to Exhibit 2.1 to the Registrant's Form
                        10-K/A1 (Amendment No. 1 to the Registrant's Annual Report on Form 10-K)
                        for the year ended December 31, 1993

3.4       -     Article of Amendment to the Articles of Incorporation of the Registrant
                        incorporated by  reference to Exhibit 3.3.1 to Form 10-K/A2 (Amendment No.
                        2 to the Registrant's Annual Report on Form 10-K) for the year ended December
                        31, 1993

3.5       -     Articles of Amendment to the Articles of Incorporation of the Registrant
                        Amending the Designation of Preferences, Rights, Privileges and Restrictions of
                        Preferred Stock of the Registrant incorporated by reference to Exhibit 3.6 to the
                        Registrant's Annual Report on Form 10-K for the year ended December 31, 1994

3.6       -     Bylaws of the Registrant incorporated by reference to Exhibit 3.2.1 to the Registration
                        Statement on Form S-11, File No. 33-71160

3.7       -     Amendment to the Bylaws of the Registrant incorporated by reference to Exhibit 3.2.2
                        to the Registration Statement on Form S-11, File No. 33-71160

3.8       -     Amendment No. 2 to Registrant's Bylaws incorporated by reference to Exhibit 3.8 to the
                        Annual Report filed on Form 10-K for the year ended December 31, 1995
</TABLE>
<PAGE>   88
<TABLE>
<S>       <C>   <C>
4.1       -     Specimen Certificate of Common Stock incorporated by reference to Exhibit 4.1 to the
                        Registration Statement on Form S-11, File No. 33-71160

4.2       -     Warrant issued to Commonwealth Associates incorporated by reference to Exhibit 4.2.1
                        to the Registration Statement on Form S-11, File No. 33-71160

10.1      -     Master Lease Agreement incorporated by reference to Exhibit 10.1 to the Annual Report
                        filed on Form 10-K for the year ended December 31, 1993

10.2      -     Amendment No. 1 to Master Lease Agreement between Jameson Inns, Inc. and Jameson
                        Operating Company (revised) incorporated by reference to Exhibit 10.2 to the
                        Annual Report filed on Form 10-K for the year ended December 31, 1995

10.3      -     Amendment No. 2 to Master Lease Agreement between Jameson Inns, Inc. and Jameson
                        Operating Company incorporated by reference to Exhibit 10.3 to the Annual
                        Report filed on Form 10-K for the year ended December 31, 1996

10.4      -     Amendment No. 3 to Master Lease Agreement between Jameson Inns, Inc. and Jameson
                        Operating Company incorporated by reference to Exhibit 10.4 to the Annual
                        Report filed on Form 10-K for the year ended December 31, 1996

10.5      -     Amendment No. 4 to Master Lease Agreement between Jameson Inns, Inc. and Jameson
                        Operating Company

10.6      -     Schedule of documents substantially similiar to Exhibit 10.1

10.7      -     Cost Reimbursement Agreement between Jameson Inns, Inc. and Kitchin Investments,
                        Inc. incorporated by reference to Exhibit 10.2 to the Registration Statement on
                        Form S-11, File No. 33-71160

10.8      -     Construction Contract between Jameson Inns, Inc. and Jameson Construction Company
                        for construction of Inns in Alexander City, Decatur, Eufala and Florence,
                        Alabama; Albany, Bainbridge, Brunswick, LaGrange, Thomaston, Waycross
                        and Waynesboro, Georgia; and Union, South Carolina, incorporated by
                        reference to Exhibit 10.7 to the Annual Report filed on Form 10-K for the year
                        ended December 31, 1995
</TABLE>
<PAGE>   89
<TABLE>
<S>       <C>   <C>
10.9      -     Schedule of documents substantially similar to Exhibit 10.8

10.10     -     Jameson 1993 Stock Incentive Plan incorporated by reference to Exhibit 10.22.1 to the
                        Registration Statement on Form S-11, File No. 33-71160

10.11     -     Form of Stock Option Agreement under Jameson Inns, Inc. Stock Incentive Plan
                        incorporated by reference to Exhibit 10.23 to the Registration Statement on Form
                        S-11, File No. 33-71160

10.12     -     Amendment No. 1 to Jameson 1993 Stock Incentive Plan incorporated by reference to
                        Exhibit 10.10 to the Annual Report filed on Form 10-K for the year ended
                        December 31, 1995

10.13     -     1994 Amendment to Jameson 1993 Stock Incentive Plan incorporated by reference to
                        Exhibit 10.11 to the Annual Report filed on Form 10-K for the year ended
                        December 31, 1995

10.14     -     Amendment No. 3 to Jameson 1993 Stock Incentive Plan incorporated by reference to
                        Exhibit 10.12 to the Annual Report filed on Form 10-K for the year ended
                        December 31, 1995

10.15     -     Jameson Inns, Inc. Director Stock Option Plan incorporated by reference to Exhibit
                        10.13 to the Annual Report filed on Form 10-K for the year ended December 31,
                        1995

10.16     -     Jameson 1996 Stock Incentive Plan incorporated by reference to Exhibit 10.45 to the 
                        Annual Report filed on Form 10-K for the year ended December 31, 1996

10.17     -     Jameson 1997 Director Stock Option Plan
</TABLE>
<PAGE>   90
<TABLE>
<S>       <C>   <C>
10.18     -     Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin
                        incorporated by reference to Exhibit 10.24 to the Registration Statement on Form
                        S-11, File No. 33-71160

10.19     -     Amendment No. 1 to Employment Agreement between Jameson Inns, Inc. and Thomas
                        W. Kitchin incorporated by reference to Exhibit 10.15 to the Annual Report filed
                        on Form 10-K for the year ended December 31, 1995

10.20     -     Amendment No. 2 to Employment Agreement between Jameson Inns, Inc. and Thomas
                        W. Kitchin incorporated by reference to Exhibit 10.16 to the Annual Report filed
                        on Form 10-K for the year ended December 31, 1995

10.21     -     Amendment No. 3 to Employment Agreement between Jameson Inns, Inc. and Thomas
                        W. Kitchin incorporated by reference to Exhibit 10.46 to the Annual Report filed
                        on Form 10-K for the year ended December 31, 1996

10.22     -     Indemnification and Hold Harmless Agreement between Jameson Inns, Inc. and Jameson
                        Operating Company incorporated by reference to Exhibit 10.25 to the Registration
                        Statement on Form S-11, File No. 33-71160

10.23     -     Indemnification and Hold Harmless Agreement between Jameson Inns, Inc. and Kitchin
                        Investments, Inc. incorporated by reference to Exhibit 10.26 to the Registration
                        Statement on Form S-11, File No. 33-71160

10.24     -     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

10.25     -     Construction Loan Agreement, Indenture, Security Agreement and Promissory Note
                        dated July 15, 1993 for $1,000,000 loan from Empire Financial Services, Inc. to
                        Jameson Inns, Inc. (formerly Jameson Company) for construction of Jameson Inn
                        in Carrollton, Georgia incorporated by reference to Exhibit 10.39 to the
                        Registration Statement on Form S-11, File No. 33-71160

10.26     -     Schedule of documents substantially similar to Exhibit 10.25
</TABLE>
<PAGE>   91
<TABLE>
<S>       <C>   <C>
10.27     -     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 filed
                        on Form 10-K for the year ended December 31, 1993

10.28     -     Deed to Secure Debt, Security Agreement, Assignment of Operating Lease, Assignment
                        of Fees and Income, Promissory Note for $1.6 million loan from Empire
                        Financial Services, Inc. to Jameson Inns, Inc. secured by Inn at Jesup, Georgia
                        incorporated by reference to Exhibit 10.24 to the Annual Report filed on Form
                        10-K for the year ended December 31, 1995

10.29     -     Schedule of documents substantially similar to Exhibit 10.28.


10.30     -     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 filed on Form 10-K for the year
                        ended December 31, 1995

10.31     -     Schedule of documents substantially similar to Exhibit 10.30.

10.32     -     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
                        incorporated by reference to Exhibit 10.3 to the Report filed on Form 10-Q for
                        the quarter ended March 31, 1996

10.33     -     Schedule of documents substantially similar to Exhibit 10.32

12.1      -     Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends

21.1      -     List of subsidiaries of the Company

23.1      -     Consent of Ernst & Young LLP
</TABLE>
<PAGE>   92
<TABLE>
<S>       <C>   <C>
27.1      -     Financial Data Schedule (for SEC use only)
</TABLE>


(b) Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter of the year ended
December 31, 1997.