<PAGE>

                                  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, 2001 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)

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

        8 Perimeter Center East, Suite 8050,
                 Atlanta, Georgia                         30346-1604
      (Address of principal executive offices)            (Zip code)
Registrant's telephone number, including area code: (770) 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

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

$1.70 Series S Cumulative Convertible Preferred Stock, par value $1.00 per share
                              (Title of Each Class)

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

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

       Aggregate market value of the voting and non-voting common equity stock
held by nonaffiliates of the registrant as of March 20, 2002: $40,489,671.

       Number of shares of common stock outstanding on March 20, 2002:
11,740,846.



                       DOCUMENTS INCORPORATED BY REFERENCE

       Portions of the proxy statement for the annual meeting of stockholders to
be held June 29, 2002 are incorporated by reference into Part III.

<PAGE>

                                   FORM 10-K
                               JAMESON INNS, INC.
                                  ANNUAL REPORT

                          YEAR ENDED DECEMBER 31, 2001

                                Table of Contents

<TABLE>
<CAPTION>
                                                                                       Page
                                                                                       ----
<S>                                                                                    <C>
Forward Looking Statements .........................................................     1

                                       PART I

Item 1.  Business ..................................................................     2
Item 2.  Properties ................................................................    29
Item 3.  Legal Proceedings .........................................................    33
Item 4.  Submission of Matters to a Vote of Security Holders .......................    33

                                       PART II

Item 5.  Market for Jameson's Common Equity and Related Stockholder Matters ........    33
Item 6.  Selected Financial Data ...................................................    34
Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operation ......................................................    37
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................    44
Item 8.  Financial Statements and Supplementary Data ...............................    44
Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure ......................................................    44

                                      PART III

Item 10. Directors and Executive Officers of the Registrant ........................    44
Item 11. Executive Compensation ....................................................    44
Item 12. Security Ownership of Certain Beneficial Owners and Management ............    44
Item 13. Certain Relationships and Related Transactions ............................    44

                                       PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..........    44
</TABLE>

                                       i

<PAGE>

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

                           Forward-Looking Statements

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

         .    Our ability to:

              .    raise additional equity capital adequate to sustain our
                   future growth;

              .    secure construction and permanent financing for new Inns on
                   favorable terms and conditions;

              .    assess accurately the market demand for new Inns and
                   expansions of existing Jameson Inns;

              .    identify and purchase or lease new sites which meet our
                   various criteria, including reasonable land prices or ground
                   lease terms;

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

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

              .    sell Inns which do not meet our investment criteria; and

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

         .    The willingness and ability of our lessee, Kitchin Hospitality,
              LLC (formerly named Jameson Hospitality, LLC), to manage the Inns
              profitably.

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

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

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

         .    Availability of qualified managers and employees necessary to
              execute our growth strategy.

                                       1

<PAGE>

         .    Changes in laws or regulations.

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

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

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

                                     PART I

ITEM 1.  BUSINESS

General

         We are a self-administered real estate investment trust, commonly
called a REIT, headquartered in Atlanta, Georgia. We develop and own limited
service hotel properties ("Inns") in the southeastern United States under the
trademark "The Jameson Inn(R)." In addition, we own Inns in the midwestern
United States operating under the trademark "Signature Inn(R)." In this report,
we sometimes refer separately to the Inns operating under the Jameson trademark
as "Jameson Inns" and to those operating under the Signature trademark as
"Signature Inns."

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

         The typical Jameson Inn developed through the end of 1998 is a
two-story, Colonial-style structure with exterior access to the guest rooms and
constructed on a one- to two-acre tract with an outdoor swimming pool, fitness
center and parking area. In late 1998, we designed and began building a new
three-story, interior corridor structure with 56 to 80 rooms, depending on the
location, and elevator access to each floor. All Jameson Inns feature 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, certain
Jameson Inns have been expanded one or more times since their initial
construction.

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

         The lodging industry is generally divided into three broad categories
based on the type of services provided. The first of these categories, full
service hotels and resorts, offers their guests rooms, food and beverage
services, meeting rooms, room service and similar guest services, and, in some
cases, resort entertainment and activities. The second category is the limited
service hotel, which generally offers rooms only and amenities such as swimming
pools, continental breakfast and similar, limited services. The third category
is the all-suite hotel or motel, which offers guests more spacious
accommodations and usually kitchen facilities in the suite and common

                                       2

<PAGE>

laundry facilities. Each of these categories is generally subdivided into
classifications based on price and quality. The terminology generally used in
the hotel industry describes properties as luxury at the high end, economy in
the middle and budget at the low end of the scale. Prices for each of these
categories vary by region and locale. Our Inns fall within the category of
small, limited service, economy hotels.

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

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

         Our mailing address is: Jameson Inns, Inc., 8 Perimeter Center East,
Suite 8050, Atlanta, Georgia 30346-1604. Our telephone number is: (770)
901-9020.

Material Developments in 2001

         During 2001, we disposed of eleven of our 40-room (440 rooms total),
exterior corridor Jameson Inn hotels located mostly in markets that have been
under-performing. The Jameson Inns sold in each quarter of 2001 were located in
the following locations:

                2001               Location
                ----               --------

           First Quarter      Hartwell, Georgia
                              Washington, Georgia
           Second Quarter     Commerce, Georgia
                              Greensboro, Georgia
                              Spartanburg, South Carolina
           Third Quarter      Asheboro, North Carolina
                              Simpsonville, South Carolina
           Fourth Quarter     Oakwood, Georgia
                              Union, South Carolina
                              Statesboro, Georgia
                              Garner, North Carolina

         Three other exterior corridor Jameson Inns, two Signature Inns and
several parcels of land were classified as held for sale at December 31, 2001
and are recorded at the lower of cost or fair value less anticipated selling
costs. During 2002, the Company may identify additional Inns to dispose of which
do not meet our investment criteria.

         During 2001, we recognized a $2,110,000 loss on impairment of real
estate related to certain hotel properties held for sale. Upon completion of the
sale of six of the hotel properties for which impairment losses were not
recorded, we recognized net gains of $903,000 during 2001. Additionally, we sold
a tract of land during the first quarter of 2001 resulting in a gain of
$197,000.

         We opened five new Jameson Inns (Richmond, Kentucky; Alcoa, Tennessee;
Shreveport, Louisiana; Lafayette, Louisiana; and Wilmington, North Carolina)
during 2001 and began construction on another (West Monroe, Louisiana). In
addition, five expansions of existing Jameson Inns were completed. Four
additional Jameson Inn expansions under construction at December 31, 2001 are
scheduled to be completed during 2002.

                                       3

<PAGE>

         During 2001, we entered into multiple interest rate cap agreements to
eliminate our exposure to increases in interest rates on $109 million of our
total outstanding indebtedness. These interest rate cap agreements limit our
exposure to increases in the prime rate above specified cap rates for one-year
periods commencing on the interest rate readjustment dates. The agreements do
not prevent us from benefiting from further decreases, if any, in the prime
rate. We incur interest on most of our indebtedness at a variable rate generally
tied to the prime rate of interest on the applicable yearly adjustment dates.

         Adjustment Date            Debt Amount      Cap Rate
         ---------------            -----------      --------

         April 1, 2002             $ 38,000,000        5.75%
         July 1, 2002              $ 53,000,000        6.25%
         October 1, 2002           $ 18,000,000        6.25%
                                   ------------
         Total                     $109,000,000
                                   ============

         We will receive cash payments from the issuer of the interest rate cap
agreements if the prime rate exceeds 5.75% on April 1, 2002, or 6.25% on July 1,
2002 or October 1, 2002. The amount of the payments, if any, will be recorded as
a reduction to interest expense. The costs of the interest rate cap agreements
(approximately $109,000) will be recognized as interest expense over the life of
the agreements.

         On January 22, 2002, the Company declared a quarterly dividend of $0.05
per common share. The dividend was paid on February 20, 2002 to shareholders of
record on February 4, 2002. This dividend was reduced from $.245 per common
share paid in the immediately preceding quarters.

         The Company's future decisions to pay its common dividend will be
determined each quarter based upon the operating results of that quarter,
economic conditions, and other operating trends. We currently anticipate that
the Company will be able to pay an aggregate of $0.20 in cash dividends per
common share during the full year of 2002. The Company expects to pay the full
quarterly cash dividends on its Series A and Series S preferred stock during the
full year of 2002.

Risk Factors

Risks Which are Specific to Jameson
-----------------------------------

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

         There are constraints on our future growth. In 2002, we plan to
complete the construction of the one new Inn and the four hotel expansions under
construction at December 31, 2001. While we expect to complete our present
development and expansion plans and have adequate capital to do so, we have no
other immediate growth plans. Our decision and our ability to expand in the
future will depend on numerous factors, including those unique to us and those
generally associated with overall hotel, real estate and general economic
conditions. Those factors specific to us include our ability to:

         .    raise additional equity capital adequate to pursue further growth
              plans;

         .    secure construction and permanent financing to finance such
              development on terms and conditions favorable to us;

         .    assess accurately the market demand for new Inns and expansions of
              existing properties;

         .    identify and purchase or lease new sites which meet our various
              criteria, including reasonable land prices and ground lease terms;

                                       4

<PAGE>

     .    contract for the construction of new Inns and expansions in a manner
          which produces hotel properties consistent with present quality and
          standards at a reasonable cost and without significant delays; and

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

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

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

     There are potential conflicts of interest that exist among us and our chief
executive officer and Kitchin Hospitality. In addition to his positions with and
stock ownership interest in us, Thomas W. Kitchin, our chairman and chief
executive officer, and his family members are the owners of Kitchin Hospitality,
which constructs, conducts capital improvements and operates all of the Inns and
pays and allocates all of our administrative overhead expenses. These
relationships create conflicts of interest in our dealings with Kitchin
Hospitality under the master leases and the various construction agreements, and
with regard to allocation and payment of our overhead expenses. In that regard,
the master leases, the form of the construction agreements and the cost
reimbursement agreement under which Kitchin Hospitality pays and allocates our
overhead were not negotiated on an arm's-length basis.

     We depend exclusively on Kitchin Hospitality for lease revenues. Certain
rules relating to the qualification of REITs prohibit us from operating the Inns
other than through a taxable REIT subsidiary and an independent contractor. To
comply with these rules, we have leased the Inns to Kitchin Hospitality. As a
result, we depend exclusively on Kitchin Hospitality for lease revenues. Kitchin
Hospitality's obligations under the master leases are unsecured. Kitchin
Hospitality has few liquid assets and limited net worth. As a result, Kitchin
Hospitality has very limited resources to perform certain of its financial
obligations under the Jameson Leases. These include indemnifying us against
various claims, damages and losses and making payments of rent. We may in the
future consider forming a taxable REIT subsidiary to serve as lessee of the
Inns, in which case the Inns would have to be managed by an independent
contractor which is actively involved in the management of other lodging
facilities for owners not related to us or the taxable REIT subsidiary. It is
possible that Kitchin Hospitality could qualify as an independent contractor and
manage the Inns on behalf of our taxable REIT subsidiary if we elect to form
one.

     Also, under the master leases, Kitchin Hospitality controls the daily
operations of the Inns and we have no ability to participate in those decisions.
Thus, even if Kitchin Hospitality were managing the Inns inefficiently or in a
manner which failed to maximize the amount of percentage rent we receive, we
would be unable to require a change in operating procedures. The master leases
limit us to seeking redress only if Kitchin Hospitality violates the lease
terms, and then only to the extent of the remedies set forth in the master
leases. Those remedies include our ability to terminate the master leases upon
certain limited events of default, including Kitchin Hospitality's failure to
pay rent.

     We will need to obtain additional debt financing on favorable terms. We
intend to borrow up to 100% of the funds required to finance the development of
new Inns and the expansion of existing Jameson Inns. We also may need to borrow
funds to pay the costs of replacement and refurbishment of furniture, fixtures
and equipment of the Inns that we are required to pay under the master leases.
Additionally, in recent years the amounts of our dividend distributions have
exceeded our cash available for distribution which has inhibited our ability to
reduce our overall level of indebtedness out of our cash flow. We are not
certain that we will be able to obtain this financing, either through commercial
borrowings or the issuance of corporate debt securities. If we are able to
borrow needed funds, we may not be able to continue to meet our debt service
obligations or to make dividend distributions at the

                                       5

<PAGE>

current level. To the extent that we cannot, we risk the loss of some or all of
our assets, including the Inns, to foreclosure, or face difficulties meeting the
REIT income distribution requirements. We recently reduced substantially the
amount of our regular quarterly dividends declared and paid on our common stock.

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

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

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

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

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

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

                                       6

<PAGE>

         The Inns' geographic concentration increases our risks from local and
regional economic downturns and other events. All currently operating Jameson
Inns are located in the Southeast and approximately 28% of our Jameson Inns'
rooms are located in Georgia. All Signature Inns are in the Midwest and
approximately 50% of Signature Inns' rooms are located in Indiana. For the
foreseeable future we will continue to restrict development of new Inns to those
two regions of the country. This geographic concentration makes us more
vulnerable to local and regional occurrences such as economic downturns,
seasonal factors and natural disasters. Any of these could adversely affect our
lease revenues and cash available for distribution.

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

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

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

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

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

         We could make changes in our investment and financing policies which
could adversely affect our financial condition and/or results of operations. Our
Board of Directors determines our investment and financing policies

                                       7

<PAGE>

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

Risks of Hotel Investments Generally
------------------------------------

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

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

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

     .    the impact of the September 11, 2001 terrorist attacks and the
          perceived possibility of future attacks on the travel and the lodging
          industry;

     .    local hotel market conditions (such as an oversupply of guest rooms);

     .    changes in governmental regulations, zoning or tax laws;

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

     .    changes in interest rate levels.

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

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

                                       8

<PAGE>

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

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

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

Risks of Real Estate Investments Generally
------------------------------------------

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

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

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

     .    there are no material claims or liabilities related to our ownership
          of the Inns,

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

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

                                       9

<PAGE>

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

Tax Risks
---------

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

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

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

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

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

The Master Leases

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

                                       10

<PAGE>

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

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

         Under the Jameson Lease, base rent is payable monthly and equals $264
per room per month multiplied by the number of rooms available to rent at the
beginning of the month. Percentage rent is payable quarterly and, at January 1,
2002, is based on the following formula:

         39% of the first $23.01 of average daily per room rental revenues; plus

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

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

         Under the Signature Lease, base rent is $394 per room per month
multiplied by the number of rooms available to rent at the beginning of the
month. Percentage rent is payable quarterly and, at January 1, 2002, is based on
the following formula:

         37% of the first $38.61 of average daily per room rental revenues; plus

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

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

         100% of base rent paid for the same period.

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

         On January 1, 2003, the $23.01 amount referred to above under the
Jameson Lease and the $38.61 amount referred to under the Signature Lease will
be increased based on the percentage increase in the Consumer Price Index for
all Urban Consumers published by the U.S. Department of Labor Bureau of Labor
Statistics for the year ended December 31, 2002. Similar adjustments will be
made on each subsequent January 1 for the year then beginning based on the
changes the Consumer Price Index experienced over the most recently completed
calendar year.

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

                                       11

<PAGE>

Lease are substantially the same as in the Jameson Lease. On or before March 1
of each year, Kitchin Hospitality 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 Jameson's financial
statements, on the amount of room revenues and percentage rent. Total rent,
including both base rent and percentage rent, which we earned under the Jameson
Lease for the years ended December 31, 1999, 2000 and 2001 was $22.7 million,
$25.4 million and $28.1 million, respectively. Total rent, including both base
rent and percentage rent we earned under the Signature Lease for the partial
year ended December 31, 1999 and the years ended December 31, 2000 and 2001, was
$11.5 million, $17.1 million and $14.7 million, respectively.

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

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

         Trademarks. Kitchin Hospitality owns the registered trademarks, The
Jameson Inn(R) and Signature Inns(R). The master leases require Kitchin
Hospitality to operate the Inns using the trademarks and not to use the
trademarks (or license their use to any other parties) for the operation of
lodging facilities other than the Inns if we object to the unrelated use. We
have consented to the use of the Jameson Inn trademark by third parties to
operate six of the Jameson Inn hotels that we sold in 2001. We anticipate that
we will continue to authorize the use of these trademarks by additional
purchasers if we make further sales of Jameson Inn hotels. We may also authorize
the use of these trademarks by other hotels which may be managed by Kitchin
Hospitality but in which we will have no financial or other direct economic
interest. We have an option to purchase The Jameson Inn(R) and Signature Inns(R)
trademarks from Kitchin Hospitality at the end of each master lease or upon the
earlier termination of the master lease with respect to all of the Inns for
$25,000 for The Jameson Inn(R) trademark and $50,000 for the Signature Inns(R)
trademark. Any acquisition of these trademarks would be subject to whatever
third party rights in them had been granted and we would likely incur
substantial additional costs in connection with the termination of the master
leases prior to the expiration of its term.

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

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

         All alterations, replacements and improvements are subject to all the
terms and provisions of the master leases and become the property of Jameson
upon termination of a master lease. In 2001, five expansions of existing Jameson
Inns were completed. Four additional Jameson Inn expansions are scheduled to be
completed during 2002.

         Hotels in general, including the Inns, have an ongoing need for
renovation and refurbishment. A significant number of Jameson Inns have been
constructed within the past two years and generally do not require any
substantial renovation or refurbishment. However, Inns older than two years
require periodic replacement of furniture, fixtures and equipment and the master
leases require that we pay the costs of the refurbishment. We have adopted a
policy of maintaining sufficient cash or available borrowings to fund
expenditures for replacement and refurbishment of furniture, fixtures and
equipment for the Inns up to an amount equal to 4% of Kitchin Hospitality's

                                       12

<PAGE>

total aggregate room revenues since July 1, 1995, less the amounts actually
expended since that date. Capital improvements to the Inns in 2002 will be
contracted to Kitchin Construction Company, a division of Kitchin Hospitality,
our general contractor for Inns that we build and for expansions of existing
Jameson Inns.

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

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

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

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

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

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

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

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

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

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

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

                                       13

<PAGE>

Plans for 2002

         Historically, our business plan has been to enhance stockholder value
by increasing funds from operations and cash available for distribution by
developing additional Inns, expanding existing Jameson Inns and participating,
through the master leases, in increased room revenues generated through
operation of the Inns by Kitchin Hospitality. For definitions and calculation of
funds from operations and cash available for distributions, see Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Due to economic and competitive conditions experienced recently, we
have substantially curtailed our plans to develop new Inns and to expand
existing Inns. During 2001 we sold 11 of the 40-room Jameson Inns which were
mostly under-performing and which no longer met our investment criteria. We plan
on selling additional Jameson and Signature Inns in the future. See Policies and
Objectives with Respect to Certain Activities - Dispositions.

         We also continue to consider other strategic alternatives as a possible
means of growth and increasing shareholder value. These include acquisitions of
other properties, business combinations, corporate restructuring, an offering of
additional equity securities and other alternatives. We may also consider the
formation of a taxable REIT subsidiary in connection with the future management
of the Inns (which may still involve Kitchin Hospitality in the management of
the Inns if it then qualifies as an independent contractor, i.e., a party which
is actively involved in the management of other lodging facilities for owners
not related to us or the taxable REIT subsidiary). . We have made no decisions
or commitments at this time, but we intend to continue to consider these
alternatives.

         Development of New Inns. We believe that selective opportunities may
still exist for the development of new Jameson Inns in certain markets in the
southeastern United States. Although we have no current plans to begin new
development of Jameson Inns, we will continue to evaluate opportunities as they
arise in targeted communities. At December 31, 2001, we had one Jameson Inn
under development (68 total additional rooms).

         We believe that Jameson has benefited significantly from its strategy
of developing new Jameson Inns because of the experience and track record of
Jameson and Kitchin Hospitality in the development, construction and operation
of Jameson Inns.

         In evaluating potential development sites, we have historically
targeted communities with strong and growing industrial bases sufficient to
attract business travelers. These communities typically have significant
manufacturing facilities, state and federal government installations, or
colleges and universities. We strive to locate our Inns in proximity to
family-style restaurants and target markets which offer local community events
(e.g. annual festivals, fishing tournaments, collegiate football games and 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.

         Although we have no specific plans to construct new or expand existing
Signature Inns, we will consider developing new Signature Inns according to our
assessment of market demand, cost and other relevant factors.

         During 2001, we entered into agreements with Best Western to convert
three Signature Inn hotels to the Best Western flag. These properties operate
under the name "BestWestern-Signature Inn." We may consider other re-flagging
opportunities in the future.

         Expansion of Existing Jameson Inns. We anticipate expanding four
Jameson Inns in 2002. We intend to continue to expand additional existing
Jameson Inns whenever market conditions warrant. To date, we have expanded 39
Jameson Inns. Since Jameson Inns built prior to 1999 were initially constructed
with the office and lobby, swimming pool and fitness center on sites generally
large enough for future expansions, the incremental cost per room of expansions
is lower than for new Inns. Accordingly, we have been able to earn returns on
the investment by expanding Jameson Inns in markets with strong room demand.
Also, as compared to the development of new Inns, expansion of existing Jameson
Inns is a relatively lower risk growth strategy since we have an opportunity to
assess local room demand and market trends based on our direct experience in
developing and owning the existing hotel. We expect to employ substantially the
same strategy regarding expansion of our currently operating Jameson Inns. The
sites for new, interior-corridor Jameson Inns, however, and all of the current

                                       14

<PAGE>

Signature Inn sites are fully developed and these properties cannot be expanded.
In these markets, expansions will occur, if at all, through the acquisition of
additional sites and the construction of new Inns.

         Kitchin Hospitality as Contractor. We anticipate that Kitchin
Hospitality will act as general contractor for new Inns we build, for
expansions, refurbishments and other capital expenditures with respect to
existing Jameson Inns. Each construction contract for a new Inn or a group of
Inns provides for a turnkey price for all work performed under the contract
subject to reduction, if Kitchin Hospitality's profits (as defined in the
construction contract) exceed 10%. The contract price excludes the cost of the
land and closing costs, but includes the costs of constructing and equipping the
Inns, including interest charges we incur on the associated construction debt
during construction and working with Kitchin Hospitality to staff the Inn prior
to opening. Each contract for refurbishment and other capital expenditures
provides for us to pay the actual cost of the work plus a 7% contractor's fee.
An independent architectural firm reviews each construction contract and each is
also subject to approval by a majority of our independent directors. The average
price charged by Kitchin Hospitality for the five new Jameson Inns opened during
2001 and the five Jameson Inns expanded in 2001 was approximately $55,732 per
guest room.

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

         Sales and Marketing. Kitchin Hospitality is responsible for marketing
the Inns. It employs a National Sales Director and a Director of Marketing in
Atlanta to assist with brand-wide sales and marketing initiatives and programs.
It focuses on local efforts directed to the business community in the city or
town where the particular Inn is located through 11 (at December 31, 2001)
direct sales managers, each of whom conducts and supervises direct sales for
designated Inns. In addition, one of the key 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.
Kitchin Hospitality employs billboards and other similar types of advertising
and has two "800" numbers to facilitate reservations for the Inns. All Jameson
Inns and Signatures have direct links to Global Distribution Systems ("GDS") for
reservations which also interfaces with major electronic reservation systems
such as Sabre, Apollo, Worldspan, System One and Amadeus. This interface
connects the Jameson and Signature Inns with travel agents nationally and
internationally.

         In addition to billboard advertising which Kitchin Hospitality has
traditionally utilized and will continue to utilize, Kitchin Hospitality places
advertisements for the Inns in regional and special event publications and in
newspapers. Kitchin Hospitality also markets the Inns through two websites:
www.jamesoninns.com and www.signature-inns.com.

         Competition. The hotel industry is highly competitive. Each of the Inns
is located in an area that has competing hotels. The number of competitive
hotels in a particular area could have a material adverse effect on occupancy,
ADR, and revenue per available room, or REVPAR, of the Inns. Many of the Jameson
Inns are located in smaller communities where the entry of even one additional
competitor into the market could materially affect the financial performance of
the Jameson Inn in that community. Many of the Signature Inns are located in
larger cities and communities in which significant new hotel and motel
development is occurring.

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

                                       15

<PAGE>

Regulations

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

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

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

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

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

Employees

         At December 31, 2001, we employed 15 persons. Our employees are also
employees of Kitchin Hospitality. Under the cost reimbursement agreement between
Jameson and Kitchin Hospitality, we reimburse Kitchin Hospitality for the time
that these shared employees spend on our business. For the year ended December
31, 2001, our reimbursement to Kitchin Hospitality totaled approximately
$875,000. None of our or Kitchin Hospitality's employees is represented by a
union or labor organization, nor have our or Kitchin Hospitality's operations
ever been interrupted by a work stoppage. We consider relations with our
employees to be excellent.

                                       16

<PAGE>

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

         The names and certain other information concerning the executive
officers of Kitchin Hospitality are set forth below. At December 31, 2001,
Kitchin Hospitality had approximately 2,100 full- and part-time employees
engaged in day-to-day management, marketing and construction of the Inns.

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

         Kitchin Hospitality changed its name from Jameson Hospitality, LLC on
October 26, 2001. Predecessors of Kitchin Hospitality include Jameson Operating
Company, Jameson Operating Company II, LLC and Jameson Development Company, LLC
which, on May 7, 1998, changed its name to Jameson Hospitality, LLC. In December
1999, Kitchin Investments, Inc. ("KI") merged into Kitchin Hospitality. KI was a
company wholly owned by Thomas W. Kitchin, our chairman and chief executive
officer, which paid, and was reimbursed for, the salaries of our employees as
well as our rent and other administrative and overhead expenses.

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

         Name                  Position
         ----                  --------

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

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

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

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

         Craig R. Kitchin has been an officer of Kitchin Hospitality and its
predecessors since its inception. Also an officer of Jameson, he became chief
financial officer of Jameson in February 1994, vice president--finance in
November 1997, and president in November 1998. He joined Jameson as its
controller and treasurer on June 15,

                                       17

<PAGE>

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 and chief executive officer of Jameson.

         Steven A. Curlee has been an officer of Kitchin Hospitality and its
predecessors since their inception. Also an officer of Jameson, he became
general counsel and secretary of Jameson on January 1, 1993 and vice
president--legal in November 1997. From April 1985 to July 1992, he was general
counsel of an oil and gas company listed on the American Stock Exchange. Prior
thereto, he was engaged in the private practice of law in Tulsa, Oklahoma for
five years. From 1976 to 1980, Mr. Curlee served on active duty in the U.S. Navy
as a Judge Advocate. He continues to serve in the Navy Reserves, 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.

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

         Gregory W. Winey is Vice President--Hotel Operations of Kitchin
Hospitality. He joined Kitchin Hospitality in April 1998 as a regional manager
supervising the operations of 17 Jameson Inns. In October 1998 he became the
director of operations supervising the operations of all Jameson Inns. Before
joining Kitchin Hospitality, he was with Promus Hotel Corporation from May 1991
to December 1997 serving in several capacities in hotel operations, most
recently as a senior area manager overseeing the daily operations of 17 hotel
properties, including Hampton Inns, Hampton Inn & Suites and Homewood Hotels.
Prior to that he was a food and beverage manager for a 300-room Days Inn Hotel
in Charlotte, North Carolina for one year, and prior to that he was employed for
six years by Traveler's Management Corporation as an innkeeper and rooms
division manager of a 432-room convention hotel.

         Joseph H. Rubin became president of Kitchin Construction Company, the
construction division of Kitchin Hospitality in October 1999. Prior to joining
Kitchin Hospitality, Mr. Rubin was president and chief executive officer of
Abrams Industries, Inc., an Atlanta based commercial real estate developer and
construction company, where he had been employed since 1979. Mr. Rubin earned a
B.A. degree in economics at Guilford College and a J.D. degree at the University
of North Carolina. He is a Certified Public Accountant and is licensed to
practice law in Georgia and North Carolina.

Policies and Objectives with Respect to Certain Activities

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

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

                                       18

<PAGE>

         We anticipate that we will conduct all of our activities directly,
although Inns located in certain states are owned by our subsidiaries and we may
participate with other entities in property ownership, through joint ventures,
partnerships or other types of co-ownership.

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

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

         Dispositions. During 2001, we sold eleven 40-room Jameson Inns. We have
recently signed contracts to sell two Jameson Inns. One Signature Inn located in
Cincinnati, Ohio was sold in February 2002. While we have presently made no
commitments to sell any other Jameson Inns or Signature Inns, one additional
40-room Jameson Inn, one additional Signature Inn and several parcels of land
were classified as held for sale at December 31, 2001. During 2002, the Company
may identify additional Inns to dispose of which are located in markets that
have been under-performing. We do not expect the sales of these properties to
result in a significant gain or loss.

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

         At December 31, 2001, we had outstanding an aggregate of approximately
$227.1 million of mortgage debt, including approximately $1.9 million in
construction debt. For new Inn construction and Inn expansions, the construction
debt provides for additional borrowings of $4.0 million and is secured by the
properties under construction.

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

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

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

         Policy Regarding Capital Expenditures.  On July 1, 1995, we adopted a
policy of maintaining cash or sufficient access to borrowings equal to 4% of the
Jameson Inns' aggregate room revenues since July 1, 1995, less

                                       19

<PAGE>

amounts actually spent from that date forward for capital expenditures. Prior to
this date, the obligation to fund replacement and refurbishment of furniture,
fixtures and equipment was Kitchin Hospitality's. This policy extends to the
Signature Inns acquired in May 1999. For the period July 1, 1995, through
December 31, 2001, 4% of room revenues equaled $14.3 million and we expended
$24.7 million on items in that same period. Thus, our actual expenditures for
these purposes have exceeded these amounts.

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

         We may make investments other than as previously described, although we
do not currently intend to do so. We have the authority to repurchase or
otherwise reacquire our common stock or any of our other securities and may
engage in such activities in the future. In August 2000, we announced a share
repurchase program of up to $10 million of our outstanding stock. Under this
program, as of December 31, 2001, we had not repurchased any shares. Most of our
repurchases, if any, will most likely be of shares of our preferred stock.

         During the past five years, except in connection with the acquisition
of billboard assets from Kitchin Hospitality and the Signature merger, we have
not issued Jameson common stock or any other securities in exchange for
property, nor have we reacquired any of our common stock or any other
securities; however, Jameson has authority to engage in such activities and may
do so in the future. During the past five years, we have not made any loans to
our officers, directors or other affiliates. We may in the future make loans to
such persons and entities, including, without limitation, our officers, and to
joint ventures in which we participate. During the last five years, we have not
engaged in trading, underwriting or agency distribution or sale of securities of
other issuers, and we do not intend to do so in the future. Our Board of
Directors may review and modify our policies with respect to such activities
from time to time without the vote of the stockholders.

         At all times, we intend to make investments in such a manner as to be
consistent with the requirements of the Internal Revenue Code to qualify as a
REIT unless, because of circumstances or changes in the Internal Revenue Code
(or in the Treasury Regulations), our Board of Directors, with the consent of a
majority of our stockholders, determines to revoke our REIT election.

         Conflicts of Interest. Because of Thomas W. Kitchin's ownership in and
positions with Jameson and Kitchin Hospitality, there are inherent conflicts of
interest in the construction of new Jameson Inns and Signature Inns and the
expansion, refurbishment and other capital expenditures relating to existing
Inns by Kitchin Hospitality. Conflicts of interest also exist in our dealings
with Kitchin Hospitality under the master leases, the construction and
refurbishing contracts and under the cost reimbursement agreement between the
two companies. See --The Master Leases; -- Growth Plans for 2002; Kitchin
Hospitality as Contractor; -- and Employees. In an effort to reduce the
conflicts of interest, we have adopted a policy of requiring that any material
transaction or arrangement between us and Kitchin Hospitality, or an affiliate
of either, is subject to approval by a majority of our independent directors.

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

Taxation of Jameson

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

                                       20

<PAGE>

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

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

         In addition, if during the 10-year period (the "Recognition Period")
beginning on the first day of the first taxable year for which we qualified as a
REIT, we recognize gain on the disposition of any asset held by us as of the
beginning of such Recognition Period, then, to the extent of the excess of (1)
the fair market value of such asset as of the beginning of such Recognition
Period over (2) our adjusted basis in such asset as of the beginning of the
Recognition Period (the "Built-In Gain"), such Built-In Gain, which may be
reduced by certain net operating loss carryforwards, will be subject to tax at
the highest regular corporate rate. The Recognition Period began January 1,
1994, and will expire December 31, 2003. Further, if we acquire any asset from a
C corporation in a transaction in which the basis of the asset in our hands is
determined by reference to the basis of the asset (or any other property) in the
hands of the C corporation (such as our acquisition of Signature Inns by reason
of our acquisition of Signature Inns, Inc. on May 7, 1999), and we recognize
gain on the disposition of such asset during the ten-year period beginning on
the date on which such asset was acquired by us, then, to the extent of the
Built-In Gain, such gain will be subject to tax at the highest regular corporate
rate, pursuant to regulations that have not yet been promulgated. The amount of
our Built-In-Gain based on the appraisals obtained in connection with our
initial public offering in 1994 is approximately $5.1 million. As a result of
our disposition of Inns during 2001, we realized Built-In Gains of $964,000.
These Built-In Gains and the associated income taxes were not recognized in 2001
but are deferred until the Company is in a net taxable income position, at which
time, the Built-In Gain will be offset by the net operating loss carryforward of
$1.2 million. The amount of our Built-In Gain attributable to the Signature Inns
acquisition is less than $1.0 million.

Requirements for Qualification

         The Internal Revenue Code defines a REIT as a corporation, trust or
association (1) which is managed by one or more trustees or directors; (2) the
beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 860 of the Internal Revenue
Code; (4) which is neither a financial institution nor an insurance

                                       21

<PAGE>

company subject to certain provisions of the Internal Revenue Code; (5) the
beneficial ownership of which is held by 100 or more persons; (6) at any time
during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by five or fewer
individuals (as defined in the Internal Revenue Code to include certain
entities); (7) which makes an election to be a REIT and satisfies all relevant
filing and other administrative requirements established by the IRS that must be
met in order to elect and maintain REIT status; (8) which uses a calendar year
for federal income tax purposes and complies with the record keeping
requirements of the Internal Revenue Code and Treasury Regulations promulgated
thereunder; and (9) which meets certain other tests, described below, regarding
the nature of its income and assets. The Internal Revenue Code provides that
conditions (1) to (4), inclusive, must be met during the entire taxable year and
that condition (5) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
We have represented that we have met since we became a publicly held company,
and we currently do meet, all of such definitional requirements.

Income Tests

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

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

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

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

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

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

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

                                       22

<PAGE>

              rental income, a portion of the personal property of that Inn may
              be sold by us to Kitchin Hospitality, with the lease payments
              adjusted accordingly.

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

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

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

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

         Under the master leases, (1) Kitchin Hospitality has the right to
exclusive possession, use and quiet enjoyment of the Inns during the term of the
master leases, (2) Kitchin Hospitality bears the cost of, and is responsible for
daily maintenance and repair of the Inns, other than the cost of maintaining
underground utilities and structural elements (including the roofs) of the
improvements, (3) Kitchin Hospitality dictates how the Inns are operated,
maintained, and improved and bears all of the costs and expenses of operating
the Inns (including the cost of any inventory used in their operation) during
the term of the leases (other than real and personal property taxes, casualty,
liability and other types of insurance and equipment and the maintenance of
structural elements, roofs and underground utilities), (4) Kitchin Hospitality
benefits from any savings in the costs of operating the Inns during the term of
the leases, (5) in the event of damage or destruction to an Inn, Kitchin
Hospitality is at economic risk because it will be obligated to restore the
property to its prior condition and bear all costs of such restoration in excess
of any insurance proceeds (except, under certain circumstances, during the last
six months of the term of the master leases), (6) Kitchin Hospitality has
indemnified us against all liabilities imposed on us during the term of the
master leases by reason of injury to persons or damage to property occurring at
the Inns or due to Kitchin Hospitality's use, management, maintenance or repair
of the Inns, and (7) Kitchin Hospitality is obligated to pay substantial fixed
rent for the term of the leases. In addition, we do not believe that the Total
Rent under the leases materially, if at all, exceeds the fair rental value of
the Inns.

                                       23

<PAGE>

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

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

     .    Kitchin Hospitality will acquire title upon the payment of a stated
          amount of "rentals" under the contract which it is required to make,

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

     .    the agreed "rental" payments materially exceed the current fair rental
          value,

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

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

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

     Any gross income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. None of our
assets are or have been held for sale to customers in the ordinary course of our
business and we will not sell an Inn or associated property in the ordinary
course of our business. We sold eleven Inns during 2001 because those Inns were
under-performing. Kitchin Hospitality advised that its projections for those
Inns indicated marginal results. The sale of Inns by us is extraordinary and we
do not consider the sale of those Inns as a part of our business. Whether
property is held "primarily for sale to customers in the ordinary course of a
trade or business" depends, however, on the facts and circumstances in effect
from time to time, including those related to a particular property.
Nevertheless, we have since January 1, 1994 complied with and we will attempt to
continue to comply with the terms of the safe- harbor provisions in the Internal
Revenue Code prescribing when asset sales will not be characterized as
prohibited transactions. Complete assurance cannot be given, however, that we
can comply with the safe-harbor provisions of the Internal Revenue Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."

     If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for such year if we are
entitled to relief under certain provisions of the Internal Revenue Code. These
relief provisions will generally be available if (1) our failure to meet such
tests is due to reasonable cause and not due to willful neglect, (2) we attach a
schedule of the sources of our gross income to our

                                       24

<PAGE>

return, and (3) any incorrect information on such schedule was not due to fraud
with intent to evade tax. We cannot state, however, whether in all circumstances
we would be entitled to the benefit of these relief provisions. As discussed
above, even if these relief provisions apply, a 100% tax would be imposed which
would be equal to the excess of 75% or 95% of our gross income over our
qualifying income in the relevant category, whichever is greater, multiplied by
the ratio that REIT taxable income bears to gross income for the taxable year
(with certain adjustments).

Asset Tests

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

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

Annual Distribution Requirements

         In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our shareholders in an amount at least
equal to (A) the sum of (1) 90% of our "REIT taxable income" (computed without
regard to the dividends paid deduction and any net capital gain) and (2) 90% of
our net income (after tax), if any, from foreclosure property, minus (B) the sum
of certain items of noncash income. In addition, if we dispose of any asset
during our Recognition Period, we will be required to distribute at least 90% of
the Built-In Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before we timely file our tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that we do not distribute all of our net
capital gain or distribute at least 90%, but less than 100% of our "REIT taxable
income," as adjusted, we will be subject to tax thereon at regular corporate tax
rates. Furthermore, if we should fail to distribute our required distribution
during each calendar year, we would be subject to a 4% nondeductible excise tax
on the excess of such required distribution over the amounts actually
distributed.

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

         Under certain circumstances, we may be able to rectify a failure to
meet the distribution requirement for a year by paying dividends to shareholders
in a later year. If we declare a dividend before the date on which our tax

                                       25

<PAGE>

return is due for a taxable year (including extensions) and distribute the
amount of such dividend to shareholders in the 12-month period following the
close of such taxable year, such subsequent year dividend may be deductible in
computing our REIT taxable income for the immediately preceding year. The
distribution of such dividend must be made no later than the date of the first
regular dividend payment made after the declaration and distribution of such
dividend and we must elect such treatment in our return.

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

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

Failure to Qualify

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

Taxation of Shareholders

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

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

                                       26

<PAGE>

holding period rules) will be treated as a long-term capital loss to the extent
of distributions from us required to be treated by such shareholder as long-term
capital gain.

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

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

         Information Reporting Requirements and Backup Withholding. We will
report to our U.S. shareholders and the IRS the amount of distributions paid
during each calendar year and the amount of tax withheld, if any. Under the
backup withholding rules, a U.S. shareholder may be subject to backup
withholding at the rate of 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 us with his correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the shareholder's income tax
liability. In addition, we may be required to withhold a portion of capital gain
distributions to any shareholders who fail to certify their non-foreign status
to us. See below "-- Taxation of Non-U.S. Shareholders."

         Taxation of Tax-Exempt Shareholders. Distributions to a U.S.
shareholder that is a tax-exempt entity should not constitute "unrelated
business taxable income" as defined in Section 512(a) of the Internal Revenue
Code ("UBTI"), provided that the tax-exempt entity has not financed the
acquisition of our shares with "acquisition indebtedness" within the meaning of
Section 514(c) of the Internal Revenue Code and the shares are not otherwise
used in an unrelated trade or business of the tax-exempt entity. In addition, if
we are considered to be a pension-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. In general, a pension-held REIT is a REIT that is held
by at least one qualified trust holding more than 25% by value of the interests
in the REIT or by one or more qualified trusts (each of whom owns more than 10%
by value) holding in the aggregate more than 50% by value of the interests in
the REIT. We are not currently a pension-held REIT.

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

         Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by us of United States real property interests and
not designated by us as capital gains dividends will be treated as dividends of
ordinary income to the extent their source is our current or accumulated
earnings and profits. Such distributions

                                       27

<PAGE>

will ordinarily be subject to a withholding tax equal to 30% of the gross amount
of the distribution unless an applicable tax treaty reduces or eliminates that
tax. However, if income from a Non-U.S. Shareholder's investment in our stock is
treated as effectively connected with the Non-U.S. Shareholder's conduct of a
United States trade or business, the Non-U.S. Shareholder generally will be
subject to a tax at graduated rates, in the same manner as U.S. Shareholders are
taxed with respect to such distributions (and may also be subject to the 30%
branch profits tax in the case of a shareholder that is a foreign corporation).
We expect to withhold United States income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Shareholder unless (1) a
lower treaty rate applies or (2) the Non-U.S. Shareholder files an IRS Form 4224
with us claiming that the distribution is "effectively connected" income within
the meaning of Section 871 of the Internal Revenue Code. Distributions in excess
of our current and accumulated earnings and profits will not be taxable to a
Non-U.S. Shareholder to the extent that such distributions do not exceed the
adjusted basis of the Non-U.S. Shareholder's shares, but rather will reduce the
adjusted basis of such shares. To the extent that 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 Jameson, as described below.
If it cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of our current and accumulated earnings and
profits, the distribution will be subject to withholding at a 30% rate. Further,
pursuant to recently enacted legislation, we will be required to withhold 10% of
any distribution in excess of our current and accumulated earnings and profits.
However, amounts withheld may be refundable if it is subsequently determined
that such distribution was in excess of our current and accumulated earnings and
profits and the amount withheld exceeded the Non-U.S. Shareholder's U.S. tax
liability, if any.

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

         Gain recognized by a Non-U.S. Shareholder upon a sale of shares
generally will not be taxed under FIRPTA if we are a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the REIT's stock was held directly or
indirectly by foreign persons. We believe that we are a "domestically controlled
REIT," and therefore the sale of our shares should not be subject to taxation
under FIRPTA. We anticipate that we will continue to be a "domestically
controlled REIT" and that sales of our shares by Non-U.S. Shareholders will not
be subject to U.S. taxation unless (1) the investment in the shares is
"effectively connected" with the Non-U.S. Shareholder's trade or business in the
United States, in which case such Non-U.S. Shareholder would be taxed at the
normal capital gain rates applicable to U.S. Shareholders (subject to any
applicable alternative minimum tax), or (2) in the case of a Non-U.S.
Shareholder who is a "nonresident alien individual", such Non-U.S. Shareholder
was present in the United States for a period or periods aggregating 183 days or
more during the taxable year and certain other conditions apply, in which case
such person would be subject to a 30% tax on his capital gains.

Other Tax Consequences

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

                                       28

<PAGE>

ITEM 2. PROPERTIES.

       The Inns. The following tables set forth certain information about our
124 operating Inns at December 31, 2001.

Jameson Inns
------------
                                    Year                              Number
                                   Opened/          Property            Of
                                  Expanded            Type          Guestrooms
                                  --------            ----          ----------
      ALABAMA:
       Albertville                  1994            Exterior            40
       Alexander City            1994/1995          Exterior            60
       Arab                         1995            Exterior            40
       Auburn                       1997            Exterior            40
       Bessemer                  1999/2000          Exterior            60
       Decatur                   1996/1999          Exterior            58
       Eufaula                      1996            Exterior            40
       Florence                  1996/1996          Exterior            63
       Greenville                   1996            Exterior            40
       Jasper                    1997/1998          Exterior            58
       Oxford (2)                   1997            Exterior            40
       Ozark                        1995            Exterior            39
       Prattville                1998/1999          Exterior            58
       Scottsboro                1998/2001          Exterior            60
       Selma                     1992/1995          Exterior            59
       Sylacauga                 1997/2001          Exterior            60
       Trussville                1998/1999          Exterior            60
       Tuscaloosa (1), (2)          1997            Exterior            40
                                                                       ---
          Subtotal (18 Inns)                                           915
                                                                       ===

     FLORIDA:
       Crestview                    2000            Interior            55
       Jacksonville                 2000            Interior            79
       Lake City                    1999            Interior            55
       Lakeland                     2000            Interior            67
       Ormond Beach                 2000            Interior            67
       Palm Bay                     2000            Interior            67
                                                                       ---
          Subtotal (6 Inns)                                            390
                                                                       ===

     GEORGIA:

       Albany                    1995/1996          Exterior            62
       Americus                1992/1993/1994       Exterior            77
       Bainbridge                1994/1995          Exterior            59
       Brunswick                 1995/1996          Exterior            60
       Calhoun                   1988/1994          Exterior            59
       Carrollton                1994/1995          Exterior            59
       Conyers                   1996/1999          Exterior            57
       Covington (3)                1990            Exterior            38
       Dalton                    1998/1999          Exterior            59
       Douglas                      1995            Exterior            40
       Dublin (1)                   1997            Exterior            40
       Eastman                      1989            Exterior            41
       Fitzgerald                   1994            Exterior            40
       Jesup                     1990/1991          Exterior            60
       Kingsland                    1998            Exterior            40

                                       29

<PAGE>

                                 Year                                  Number
                                Opened/              Property            Of
                               Expanded                Type          Guestrooms
                               --------                ----          ----------
       LaGrange                1996/1998             Exterior            56
       Macon                      1997               Exterior            40
       Newnan                     2000               Interior            67
       Perry                      1998               Exterior            40
       Pooler                     2000               Interior            55
       Rome                       1999               Interior            67
       Thomaston               1990/1996             Exterior            60
       Thomasville (1)            1998               Exterior            39
       Valdosta                1995/1995             Exterior            55
       Warner Robins              1997               Exterior            59
       Waycross                1993/1996             Exterior            60
       Waynesboro (3)             1996               Exterior            40
       Winder  (3)                1988               Exterior            39
                                                                      -----
          Subtotal (28 Inns)                                          1,468
                                                                      =====

     KENTUCKY

       Richmond                   2001               Interior            67
                                                                      =====

     LOUISIANA:

       Lafayette                  2001               Interior            79
       Shreveport                 2001               Interior            67
                                                                      -----
       W. Monroe (4)              2002                  --               --
          Subtotal (2 Inns)                                             146
                                                                      =====

     MISSISSIPPI:

       Grenada                    1999               Exterior            39
       Jackson                    2000               Interior            67
       Meridian                1999/1999             Exterior            59
       Pearl                      2000               Interior            67
       Tupelo                  1998/1998             Exterior            60
       Vicksburg               1999/1999             Exterior            59
                                                                      -----
          Subtotal (6 Inns)                                             351
                                                                      =====

     NORTH CAROLINA:
       Dunn (1)                   1998               Exterior            40
       Eden                       1998               Exterior            39
       Forest City             1997/1998             Exterior            59
       Goldsboro                  2000               Interior            67
       Greenville                 1998               Exterior            40
       Henderson                  2000               Interior            67
       Hickory                 1998/1999             Exterior            59
       Laurinburg                 1997               Exterior            40
       Lenoir                     1998               Exterior            39
       Roanoke Rapids             1998               Exterior            39
       Sanford                    1997               Exterior            40
       Smithfield                 1998               Exterior            40
       Wilson                     1997               Exterior            39
       Wilmington                 2001               Interior            67
                                                                      -----
          Subtotal (14 Inns)                                            675
                                                                      =====

                                       30

<PAGE>

                                       Year                            Number
                                      Opened/         Property           Of
                                     Expanded           Type         Guestrooms
                                     --------           ----         ----------

     SOUTH CAROLINA:
       Anderson                      1993/1994        Exterior            57
       Cheraw                        1995/1999        Exterior            57
       Duncan                          1998           Exterior            40
       Easley (2)                      1995           Exterior            40
       Gaffney                       1995/1997        Exterior            58
       Georgetown (2)                  1996           Exterior            40
       Greenwood                     1995/1996        Exterior            64
       Lancaster                     1995/2001        Exterior            62
       Orangeburg                    1995/2001        Exterior            56
       Seneca                        1996/2001        Exterior            60
                                                                       -----
          Subtotal (10 Inns)                                             534
                                                                       =====

     TENNESSEE:
       Cleveland                     1998/1999        Exterior            60
       Decherd                         1997           Exterior            40
       Columbia                        2000           Interior            55
       Gallatin                      1999/1999        Exterior            59
       Greenville                      2000           Interior            55
       Jackson                         2000           Interior            67
       Johnson City                    1997           Exterior            59
       Kingsport                       2000           Interior            55
       Oak Ridge                       1999           Interior            79
       Tullahoma                       1997           Exterior            40
       Alcoa                           2001           Exterior            67
                                                                       -----
          Subtotal (11 Inns)                                             636
                                                                       =====

     VIRGINIA:
       Harrisonburg                    2000           Interior            67
       Martinsville                    2000           Interior            55
                                                                       -----
          Subtotal (2 Inns)                                              122
                                                                       =====

     JAMESON INN TOTAL (98 Inns)                                       5,304
                                                                       =====

(1)  Land is subject to a ground lease.
(2)  An expansion of this Inn is planned for 2002.
(3)  Property is held for sale at December 31, 2001.
(4)  Property is under construction at December 31, 2001 and is scheduled to
     open during 2002.

                                       31

<PAGE>

Signature Inns
--------------
                                                                        Number
                                      Year           Property             Of
                                     Opened            Type           Guestrooms
                                     ------            ----           ----------

 INDIANA:
   Indianapolis North                 1981           Interior             137
   Fort Wayne                         1982           Interior             102
   Castleton                          1983           Interior             125
   Lafayette                          1983           Interior             121
   Muncie                             1984           Interior             101
   Southport                          1985           Interior             101
   Indianapolis East                  1985           Interior             101
   Indianapolis West                  1985           Interior             101
   Kokomo (2)                         1986           Interior             101
   Evansville                         1986           Interior             125
   Terre Haute (3)                    1987           Interior             150
   Elkhart                            1987           Interior             125
   South Bend                         1987           Interior             123
   Carmel                             1997           Interior              81
                                                                        -----
     Subtotal (14 Inns)                                                 1,594
                                                                        =====


  OHIO:
   Cincinnati (North)                 1985           Interior             130
   Cincinnati (Northeast) (3)         1985           Interior              99
   Columbus                           1986           Interior             125
   Dayton                             1987           Interior             125
                                                                        -----
     Subtotal (4 Inns)                                                    479
                                                                        =====

  KENTUCKY:
   Florence                           1987           Interior             125
   Louisville South                   1988           Interior             119
   Louisville East (2)                1997           Interior             119
                                                                        -----
     Subtotal (3 Inns)                                                    363
                                                                        =====
  ILLINOIS:
   Normal                             1988           Interior             124
   Peoria (2)                         1988           Interior             124
   Springfield (1)                    1996           Interior             124
                                                                        -----
     Subtotal (3 Inns)                                                    372
                                                                        =====
  IOWA:
   Bettendorf                         1989           Interior             119
                                                                        =====

  TENNESSEE:
   Knoxville                          1989           Interior             124
                                                                        =====

  SIGNATURE INNS TOTAL (26 Inns)                                        3,051
                                                                        =====

      (1)   Land is subject to a ground lease.
      (2)   Operates as both a Best Western and a Signature Inn.
      (3)   Property is held for sale at December 31, 2001.

                                       32

<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

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

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

         No matters were submitted to security holders for a vote during the
fourth quarter of fiscal year 2001 through the solicitation of proxies or
otherwise.

                                     PART II

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

         As of March 20, 2002, there were approximately 3,300 holders of record
of our common stock and, we estimate, approximately 9,500 beneficial holders of
our common stock.

Comparative Per Share Market Price and Dividend Information

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

                                               Jameson Common Stock(1)
                                          ---------------------------------
                                                                  Cash
                                                                Dividends
                                            High        Low     Per Share
                                            ----        ---     ---------
           2001
           ----
           First Quarter                   $ 7.50      $5.813     $.245
           Second Quarter                    7.55        6.25      .245
           Third Quarter                     7.39        6.00      .245
           Fourth Quarter                    6.65        3.28      .245

           2000
           ----
           First Quarter                     7.75        6.50      .245
           Second Quarter                  7.8125        6.50      .245
           Third Quarter                   8.3125       7.125      .245
           Fourth Quarter                  7.5625        5.50      .245

(1)      Our common stock trades on The Nasdaq National Market under the symbol
"JAMS."

         We intend to continue making regular quarterly distributions to our
stockholders, although the amount of our regular quarterly dividend on our
common stock has recently been reduced to $.05 per share and it is possible that
if the results of operations continue to decline, the amount of the dividends
declared and paid on our common stock may be further reduced or even eliminated.
Our cash available for distribution is generally an amount equal to our net
income from operations plus the amount of non-cash expenses we record, such as
amortization, depreciation and stock compensation expenses, less amounts we
believe should be retained for working capital purposes, debt

                                       33

<PAGE>

service or anticipated capital expenditures. In recent years, our dividend
distributions have exceeded our cash available for distribution.

ITEM 6.  SELECTED FINANCIAL DATA

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

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

                               JAMESON INNS, INC.
                         SELECTED FINANCIAL INFORMATION
          (dollars in thousands, except per share data, ADR and REVPAR)

<TABLE>
<CAPTION>
                                            2001        2000        1999        1998        1997
                                            ----        ----        ----        ----        ----
<S>                                       <C>         <C>         <C>         <C>         <C>
Balance Sheet Data:
Investment in real estate (before
   accumulated depreciation)              $381,749    $372,415    $320,960    $168,880    $117,515

Net investment in real estate              329,874     334,091     296,583     152,125     104,931

Total assets                               339,361     346,725     322,852     156,329     107,606

Total mortgage debt                        227,063     207,145     173,958      53,697      29,625

Stockholders' equity                       106,615     126,741     136,303      98,869      75,161
</TABLE>

                                       34

<PAGE>

<TABLE>
<CAPTION>
                                          2001        2000        1999        1998        1997
                                          ----        ----        ----        ----        ----
<S>                                     <C>         <C>         <C>        <C>          <C>
Financial Data:

Lease revenues                          $ 43,611    $ 43,232    $ 34,669   $ 18,230     $12,966
Expenses:
  Depreciation                            19,517      14,620      10,397      5,636       3,898
  Property and other taxes and
    insurance expense                      5,320       4,541       3,186      1,524       1,107
  General and administrative
   expenses                                1,660       1,405       1,131        592         445
  (Gain) loss on disposal of
    furniture and equipment                   --          --         755        508         144
  (Gain) loss on sale of
    Real Estate                           (1,100)       (283)
  Write-off and amortization of
    offering costs                            --         176         100          -           -
  Loss on impairment of
    real estate                            2,110           -           -      2,507           -
                                        --------    --------    --------   --------     -------
Income from operations                    16,104      22,773      19,100      7,463       7,372
  Interest expense, net of
    amounts capitalized                   18,864      14,942       8,429      1,656         778
  Other income                                33          48         100          -           -
                                        --------    --------    --------   --------     -------
Income (loss) before
  Extraordinary item                      (2,727)      7,879      10,771      5,807       6,595
Extraordinary loss                           341          88           -        134         689
                                        --------    --------    --------   --------     -------

Net income (loss)                         (3,068)      7,791      10,771      5,673       5,906

Preferred stock dividends                  6,669       6,696       5,387      2,788           -
                                        --------    --------    --------   --------     -------
Net income (loss) attributable to
    common stockholders                   (9,737)      1,095       5,383      3,485       5,906
Basic earnings before
  extraordinary item                       (0.84)       0.11        0.51       0.37        0.72
Diluted earnings before
  extraordinary item                       (0.84)       0.10        0.51       0.36        0.70
Basic earnings per
  Common share                             (0.87)       0.10        0.51       0.36        0.64
Diluted earnings per
  Common share                             (0.87)       0.10        0.51       0.35        0.63
Dividends paid per
  Common share                              0.98        0.98        0.97       0.94        0.90
Cash flow provided by
  operating activities                    17,528      37,201      23,203     13,845      11,911
Cash flow used in
  investing activities                   (16,311)    (51,818)    (40,228)   (55,845)    (37,362)
Cash flow provided by
  financing activities                     1,563      14,063      19,056     42,161      25,581
</TABLE>

                                       35

<PAGE>

<TABLE>
<CAPTION>
                                           2001          2000      1999       1998       1997
                                           ----          ----      ----       ----       ----

         <S>                                <C>        <C>        <C>        <C>        <C>
         Other Data:
         Funds from operations (1)          $11,328    $16,016    $16,658    $ 12,270   $ 10,637

         Ratio of earnings to fixed
           charges and preferred stock
           dividends (2)                       0.62       0.98       1.25        1.50       5.21
</TABLE>

<TABLE>
<CAPTION>
         ----------------------------------------------------------------------------------------

Jameson Inns:                                   2001         2000         1999         1998        1997
                                                ----         ----         ----         ----        ----
<S>                                        <C>          <C>          <C>          <C>           <C>
Occupancy rate                                  54.8%        57.1%        60.0%        61.7%       64.9%

ADR                                        $    56.52   $    54.92   $    53.05   $    50.60    $  47.25

REVPAR                                     $    30.99   $    31.34   $    31.84   $    31.21    $  30.68

Room Revenues (3)                          $   61,042   $   53,989   $   48,358   $   38,787    $ 27,588

Room nights available                       1,939,578    1,688,485    1,485,849    1,216,998     878,056

Operating Inns (at period end)                     98          104           88           81          62

Rooms available (at period end)                 5,304        5,300        4,241        3,748       2,924

<CAPTION>
                                                   2001          2000      1999 (4)      1998 (4)       1997 (4)
                                                   ----          ----      --------      --------       --------
<S>                                          <C>           <C>           <C>           <C>            <C>
Signature Inns:

Occupancy rate                                     48.2%         55.9%         57.9%         61.5%          64.0%

ADR                                          $    62.89    $    64.81    $    63.41    $    61.48     $    58.68

REVPAR                                       $    30.30    $    36.21    $    36.73    $    37.81     $    37.53

Room Revenues (3)                            $   35,165    $   42,107    $   42,817    $   43,971     $   42,960

Room nights available                         1,113,615     1,116,674     1,116,535     1,114,960      1,080,263

Operating Inns (at period end)                       26            26            26            26             26

Rooms available (at period end)                   3,051         3,051         3,059         3,059          3,059
</TABLE>

__________

(1)  In October 1999, NAREIT issued clarification effective as of January 1,
     2000 stipulating that FFO should include both recurring and non-recurring
     operating results. Consistent with this clarification, non-recurring items
     that are not defined as "extraordinary" under GAAP will be reflected in the
     calculation of FFO. Gains and losses from the sale of operating property
     will continue to be excluded from the calculation of

                                       36

<PAGE>

          FFO. 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 Jameson'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.

     (2)  For purposes of computing these ratios, earnings have been calculated
          by adding fixed charges (excluding capitalized interest and preferred
          stock dividends) to income before extraordinary item. Fixed charges
          consist of interest costs whether expensed or capitalized,
          amortization of debt discounts and issue costs whether expensed or
          capitalized and preferred stock dividends in applicable periods.
          Jameson paid preferred stock dividends in 2001, 2000, 1999 and 1998.
          There were deficiencies in the amounts of earnings available to cover
          fixed charges, as defined, in the amounts of $400,000 in 2000 and $9.8
          million in 2001.

     (3)  The master leases between Jameson and Kitchin Hospitality with regard
          to the Jameson Inns and the Signature Inns define "Room Revenues" to
          include gross room rentals, revenues from telephone charges, vending
          machine payments and other miscellaneous revenues and excludes all
          credits, rebates and refunds, utility surcharges, sales taxes and
          other excise taxes.

     (4)  Assumes that the Signature Inns were owned as of January 1 of the
          respective year.


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

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

General

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

<TABLE>
<CAPTION>
                                                        Year Ended December 31

Jameson and Signature Combined Brands           2001            2000            1999
                                                ----            ----            ----
<S>                                          <C>             <C>             <C>
Occupancy rate                                      52.4%           56.6%           60.0%

ADR                                          $     58.66     $     58.81     $     56.36

REVPAR                                       $     30.74     $     33.28     $     33.83

Room rentals (000s)                          $    93,844     $    93,352     $    74,246

Other Inn revenues (000s)                    $     2,363     $     2,744     $     2,181

Room Revenues (000s)                         $    96,207     $    96,096     $    76,427

Room nights available                          3,053,193       2,805,159       2,194,613

Operating Inns (at period end)                       124             130             114

Rooms available (at period end)                    8,355           8,351           7,300
</TABLE>

          We have grown from a hotel chain with four Jameson Inns at January 1,
1990, to 98 Jameson Inns and 26 Signature Inns in operation at December 31,
2001. In addition, we have one Jameson Inn under development.

                                       37

<PAGE>

From our inception in 1988 until December 31, 1993, we were engaged in the
business of developing, owning and managing Jameson Inns. As part of our
development activities, we engaged in development and construction of new
Jameson Inns. On December 31, 1993, we reorganized by divesting ourselves of the
subsidiary corporations through which we conducted our construction activities,
securities brokerage activities and aviation operations. In addition, we
transferred our outdoor advertising business to Kitchin Hospitality's
predecessor. We no longer manage or operate our Inns upon their completion, but
limit our primary activities to developing and owning the properties. Effective
January 1, 1994, our primary source of revenue became lease payments by Kitchin
Hospitality which leases and operates our Inns under the master leases.

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

     On May 7, 1999, we merged with Signature Inns, Inc. which owned and
operated a chain of limited service hotels in the Midwest. In this merger, we
acquired 25 Signature Inns and an interest in a limited partnership which owned
an additional Signature Inn. In December 1999, we acquired the outstanding
limited partnership interest in that partnership, dissolved the partnership and
took direct ownership of the hotel property. As a result of these transactions,
at December 31, 2001, we owned a total of 26 Signature Inns located in six
midwestern states. All of the Signature Inns are also leased to Kitchin
Hospitality.

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

     The master leases provide for the payment of base rent and percentage rent.
For the year ended December 31, 2001, we earned a combined base rent and
percentage rent in the aggregate amount of $28.1 million from rental of Jameson
Inns and $14.7 million from rental of Signature Inns. The principal determinant
of percentage rent under the master leases is room revenues of our Inns.
Therefore, we believe that a review of the historical performance of the
operations of our operating Inns' occupancy, ADR and REVPAR is appropriate for
understanding our lease revenue (see --Funds from Operations; Cash Available for
Distribution, below, for the calculation of ADR and REVPAR).

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

Results of Operations

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

     For fiscal 2001, we earned base rent and percentage rent in the aggregate
amount of $42.9 million. Our lease revenue for 2001 increased $0.3 million as
compared to fiscal 2000. This was due to the following factors:

     .    Lease revenues earned from the Signature Inns decreased approximately
          $2.4 million in 2001 versus 2000 due to a decline in the occupancy
          rate from 55.9% in 2000 to 48.2% in 2001 and a 3% decrease in 2001 in
          the average daily rate charged for rooms ($62.89 for 2001 compared to
          $64.81 for 2000).

                                       38

<PAGE>

     .    Lease revenues earned from the Jameson Inns increased approximately
          $2.7 million in 2001 as compared to 2000, due to an increase in
          available rooms during 2001. One new Jameson property was opened
          during the third quarter 2001, and 22 new Jameson Inns were completed
          during 2000. The increase in the number of rooms due to the opening of
          new Inns was offset partially by the sale of eleven Jameson Inns
          during 2001.

     .    A softening U.S. economy during 2001 along with the dramatic effect of
          the September 11, 2001 terrorist attacks resulted in an unprecedented
          slowdown in travel and demand for hotel rooms generally.

     Additionally, we received $734,000 in billboard lease rentals during 2001,
compared to $680,000 in 2000.

     Our property and other taxes and insurance expenses totaled $5.3 million in
2001, compared with $4.5 million for 2000. The increase is attributable
primarily to the increase in the number of operating Jameson Inns subsequent to
December 31, 2000.

     Our depreciation expense increased from $14.6 million in 2000 to $19.5
million in 2001, due primarily to an increase in the number of operating Jameson
Inns subsequent to December 31, 2000 and on the increase in capital expenditures
on the inns subsequent to December 31, 2000.

     Our general and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office. Our
general and administrative expenses for 2001 increased to $1.7 million as
compared to $1.4 million in 2000 due to additional time spent by shared
employees in our business matters as compared to Kitchin Hospitality's.

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

     Our interest expense increased from $14.9 million in 2000 period to $18.9
million in 2001. This was the result of higher average principal indebtedness
outstanding related primarily to the opening of new Jameson Inns subsequent to
December 31, 2000, and a slightly higher average effective interest rate for
2001 as compared to 2000.

     Comparison of the Year Ended December 31, 2000 to the Year Ended December
31, 1999.

     Our lease revenue for 2000 increased 24.6% to $42.6 million as compared to
$34.2 million for 1999. The increase was due to an increase in Kitchin
Hospitality's room revenues.

     As a result of the following three factors, Kitchin Hospitality's room
revenues rose 25.7%, from $76.4 million for 1999 to $96.1 million in 2000:

     .    The number of room nights available at our Inns increased from
          2,194,613 in 1999 to 2,805,159 in 2000, or 27.8%, due to the
          acquisition of Signature Inns in May 1999 resulting in 407,910
          additional room nights available and the opening from January 1999
          through December 2000 of 17 new Jameson Inns (1,079 total additional
          rooms) and the expansion of one existing Jameson Inn (20 total
          additional rooms), offset partially by the sale of two Jameson Inns,
          Milledgeville, Georgia (100 rooms) in July 1999 and Clinton, Tennessee
          (40 rooms) in February 2000.

     .    The occupancy rate for all Inns decreased from 60.0% for 1999 to 56.6%
          for 2000. The decrease in overall occupancy of the Inns is
          attributable primarily to:

                                       39

<PAGE>

          .    additional competition in certain markets in which are Inns are
               located, and

          .    the impact from our recently opened larger interior-corridor
               properties which achieved start-up occupancies which are lower
               than our mature hotel properties.

     .    The ADR for all Inns increased 4.3% from $56.36 in 1999 to $58.81 in
          2000.

     Kitchin Hospitality's Same Inn Room Revenues for Jameson Inns for 2000
compared to 1999 declined to $43.9 million from $44.1 million due to a decrease
in the occupancy rate of these Inns from 61.2% in 1999 to 59.2% in 2000,
partially offset by an increase in ADR from $52.93 to $54.23 for these Inns and
the expansion of one of these Inns since January 1999

     Revenue from the rental of billboards increased from $474,000 in 1999 to
$680,000 in 2000, reflecting a full twelve months of lease rentals. The
billboards were acquired in April of 1999.

     Our general and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office. Our
general and administrative expense for 2000 was $1.4 million, as compared to
$1.1 million for 1999, due to additional costs resulting from our increased size
and more time spent by shared employees on our business matters as compared to
Kitchin Hospitality's.

     Our property and other taxes and insurance expenses totaled $4.5 million in
2000, compared with $3.2 million for 1999. The increase is attributable
primarily to the increase in the number of Inns as a result of the Signature
acquisition in May 1999, the construction and expansion of Jameson Inns and an
increase in franchise taxes of $147,000.

     Our interest expense increased from $8.4 million in 1999 to $14.9 million
in 2000. This was the result primarily of interest rate increases and greater
amounts of average principal indebtedness outstanding as a result of our
assumption of $67.1 million of mortgage indebtedness in connection with the
Signature acquisition in May 1999 and increased indebtedness related to the
development of new Jameson Inns.

     Our depreciation expense increased from $10.4 million in 1999 to $14.6
million in 2000, due primarily to the Signature acquisition in May 1999 and an
increase in the number of operating Jameson Inns.

             Funds From Operations; Cash Available For Distribution

     The following table illustrates our calculation of funds from operations
and cash available for distribution on a historical basis for the years ended
December 31, 2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                                -----------------------
                                                              2001      2000        1999
                                                              ----      ----        ----
                                                                 (dollars in thousands)
<S>                                                        <C>        <C>        <C>
Net income (loss) available to common stockholders         ($ 9,737)  $ 1,095    $ 5,383

Add (subtract):

  Depreciation expense                                       19,517    14,620     10,396

  Adjustment for equity share of hotel limited
    partnership                                                   -         -         24

  Amortization of offering costs                                  -       176          -
</TABLE>

                                       40

<PAGE>

<TABLE>
<S>                                                                   <C>             <C>            <C>
  (Gain) Loss on disposals                                               (903)             37             755

  Write-off of offering costs                                               -               -             100

  Extraordinary item                                                      341              88               -

  Loss on impairment of real estate                                     2,110               -               -
                                                                      -------         -------        --------

Funds from operations                                                  11,328          16,016          16,658

Add:
  Loan fee amortization expense                                           751             597             228

Less:
  Additions to reserve for furniture, fixtures and
    equipment (1)                                                      (3,848)         (3,844)         (3,057)

  Required loan principal repayments                                   (6,144)         (5,288)         (2,365)
                                                                      -------         -------        --------
Cash available for distribution                                       $ 2,087         $ 7,481        $ 11,464
                                                                      =======         =======        ========
</TABLE>

___________
(1)  This amount equals 4% of the room revenues of our Inns for the respective
period.

Liquidity and Capital Resources

         We generated $17.6 million of cash from operations during 2001. Our
principal sources of liquidity are:

            .    our funds generated from operations,
            .    existing cash on hand,
            .    the remaining availability under the construction loans,
            .    proceeds from the refinancing of Inns with increased
                 borrowing capacity, and
            .    net proceeds from the sale of our properties held for sale.

         These funds are used to meet the future financing needs for the
properties under construction and expansion, the refurbishing costs of our
existing Inns, and certain other operating needs including the payment of
dividends and other operating expenses. As a REIT, we must distribute to
stockholders at least 90% of our taxable income, excluding net capital gains, to
preserve the favorable tax treatment accorded to a REIT under the Internal
Revenue Code. We expect to fund these distributions through cash generated from
operations, existing cash on hand and external borrowings.

         Our net cash used in investing activities for 2001 totaled $16.3
million. We received net cash proceeds totaling $14.2 million from the sale of
eleven Inns and a parcel of land. Proceeds from these asset sales were primarily
used to retire debt. Additions to property and equipment totaled $30.5 million
for 2001 as compared to $53.9 million in 2000. Included in additions to property
and equipment are capital expenditures for existing Inns refurbishing and
renovations of approximately $8.6 million for 2001 as compared to $5.2 million
for 2000. These expenditures exceed our minimum policy of 4% of Inn room
revenues, which we spend for capital improvements and the refurbishment and
replacement of furniture, fixtures and equipment at our Inns. These capital
expenditures are funded from operating cash flow, and possibly from additional
borrowings. These capital expenditures are in addition to amount spent on normal
repairs and maintenance, which are paid for by the lessee Kitchin Hospitality,
LLC. The remaining $22.1 million is due primarily to the opening of five new
Inns and expansions of five Inns in 2001.

         Our net cash provided by financing activities during 2001 totaled $1.6
million. This amount included the payment of distributions to common and
preferred shareholders of $18.1 million, net proceeds from our Dividend

                                       41

<PAGE>

Reinvestment Plan of $.7, proceeds from mortgage notes net of repayments of
$27.7 million, and scheduled long-term debt payments of $6.1 million.

         We expect to selectively continue to develop additional Jameson Inns
and to expand existing Jameson Inns, as suitable opportunities arise and if
adequate sources of financing are available. Since our election to be taxed as a
REIT, we have financed construction of new Jameson Inns and currently intend to
continue financing the construction of any new Inns entirely with bank
borrowings. While we believe we can continue to finance new Inns and expansions
with these construction and long-term mortgage loans, we will need additional
debt financing for this growth.

         At December 31, 2001 the Company had total indebtedness of $227
million. Of this amount, approximately $200 million is variable rate debt
adjustable during 2002, which primarily consists of individual property
mortgages that adjust one time per year and are based off of the prime rate or
U.S. Treasury rate. Most of the debt that adjusts during 2002 will be fixed for
twelve months following the adjustment dates.

         During 2001, the Company entered into multiple interest rate cap
agreements on $109 million of outstanding indebtedness. These interest rate cap
agreements limit the Company's exposure to increases in the prime rate above
specified cap rates, for one-year periods commencing on the interest rate
readjustment dates shown below. The agreements do not prevent the Company from
benefiting from further decreases, if any, in the prime rate. The Company incurs
interest on most of its indebtedness at a variable rate generally tied to the
prime rate of interest on the applicable yearly adjustment dates.

                                         Debt Amount
                Adjustment Date         (in millions)     Cap Rate
                ---------------         -------------     --------

             April 1, 2002                $   38.0          5.75%
             July 1, 2002                 $   53.0          6.25%
             October 1, 2002              $   18.0          6.25%
                                          --------
                  Total                   $  109.0
                                          ========

         As of December 31, 2001, we had one Jameson Inn under construction with
total remaining construction costs, excluding land and closing costs, expected
to total $4.0 million when the project is complete. For this property, we had
obtained a commitment of $2.6 million, all of which was available at December
31, 2001. The four expansions under construction at December 31, 2001 are
expected to total $3.4 million when the projects are complete. We have obtained
construction loan commitments of $2.9 million, with remaining availability of
$2.9 million at December 31, 2001. To fund the completion of the properties
under construction we will use the remaining availability under the construction
loans, availability on the Lines and proceeds from the refinancing of Inns with
increased borrowing capacity. We are also considering possible additional
long-term debt or equity financing that would be available to fund our ongoing
development activities.

         In January 1997, we filed a shelf registration statement on Form S-3
with the SEC to provide additional financing. In September 1999, we filed a
post-effective amendment to that registration statement. See Item 1.
Business--Policies and Objectives with Respect to Certain Activities--Financing
for a description of the registration statement and post-effective amendment.

         In August 2000, we announced a share repurchase program of up to $10
million of our outstanding stock. Most of our repurchases, if any, will most
likely be of shares of our preferred stock, but they may include our common
stock as well. As of December 31, 2001, no shares have been repurchased under
the program.

         We have four stock incentive plans in place. As of December 31, 2001,
1,422,379 shares of our common stock were reserved for issuance, including
100,942 available for future option grants and restricted stock grants
under the 1993 and 1996 plans. Options to purchase 1,019,433 shares of our
common stock were outstanding (including 615,443 which were exercisable). In
addition, as of December 31, 2001, 502,570 shares of our common

                                       42

<PAGE>

stock issued to certain key employees of Jameson and Kitchin Hospitality are
restricted as to sale until vested in 2006 through 2010.

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

Inflation

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

Critical Accounting Policies

         The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the U.S., which require us to make
estimates and assumptions (see note 1 to the consolidated financial statements).
We believe that of our significant accounting policies (see note 2 to the
consolidated financial statements), the following may involve a higher degree of
judgment and complexity.

Impairment of real estate assets

         Whenever events or changes in circumstances indicate that the carrying
values of our property and equipment may be impaired, we perform an analysis to
determine the recoverability of the asset's carrying value. The carrying value
of the asset includes the original purchase price (net of depreciation) plus the
value of all capital improvements (net of depreciation). If the analysis
indicates that the carrying value is not recoverable from future cash flows, we
write down the asset to its estimated fair value and recognize an impairment
loss. The estimated fair value is based on what we estimate the current sale
price of the asset to be based on comparable sales information or other
estimates of the asset's value. Any impairment losses we recognize are recorded
as operating expenses. In 2001, we recognized $2.1 million of impairment losses.
We did not recognize any impairment losses in 2000 or 1999.

         We review long-lived assets for impairment when the current or
immediate short-term (future twelve months) projected cash flows are
significantly less than the most recent historical cash flows. We make estimates
of the undiscounted cash flows from the expected future operations of the asset.
In projecting the expected future operations of the asset, we base our estimates
on future budgeted earnings before interest expense, income taxes, depreciation
and amortization, or EBITDA, amounts and use growth assumptions to project these
amounts over the expected life of the underlying asset. Our growth assumptions
are based on assumed future improvements in the economy and improvements in
demand for lodging in our markets; if actual conditions differ from those in our
assumptions, the actual results of each asset's actual future operations could
be significantly different from the estimated results we used in our analysis.

Overhead Allocation from Kitchin Hospitality

         Kitchin Hospitality operates all of our Inns and pays all of our
salaries and administrative overhead expenses pursuant to the Cost Reimbursement
Agreement. The overhead allocation pursuant to the Cost Reimbursement Agreement
involves a substantial number of estimates pertaining to the allocation between
entities of employee's time and various other costs. Kitchin Hospitality charged
the Company $875,000, $962,000, and $417,000 in 2001, 2000 and 1999,
respectively of allocated salaries, office overhead and other general and
administrative costs pursuant to the Cost Reimbursement Agreement.

                                       43

<PAGE>

Accrued Expenses

         The Company relies on various estimates to determine the amounts that
are recorded as accrued expenses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The financial statements and supplementary data are indexed in Item 14
of this report.

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

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required to be contained in this Item is incorporated
by reference to our definitive proxy statement to be filed with respect to our
2002 annual meeting under the headings "Proposal One -- Election of Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance."

ITEM 11. EXECUTIVE COMPENSATION

         The information required to be contained in this Item is incorporated
by reference to our definitive proxy statement to be filed with respect to our
2002 annual meeting under the heading "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required to be contained in this Item is incorporated
by reference to our definitive proxy statement to be filed with respect to our
2002 annual meeting under the heading "Principal Stockholders and Security
Ownership of Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required to be contained in this Item is incorporated
by reference to our definitive proxy statement to be filed with respect to our
2002 annual meeting under the heading "Certain Transactions."

                                     PART IV

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

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

         Report of Independent Auditors                                     F-1

                                       44

<PAGE>

<TABLE>
        <S>                                                                                                  <C>
        Consolidated Balance Sheets as of December 31, 2001 and 2000                                         F-2

        Consolidated Statement of Operations for each of the three years ended
        December 31, 2001, 2000 and 1999                                                                     F-3

        Consolidated Statements of Stockholders' Equity for each of the three years ended December 31,
        2001, 2000 and 1999                                                                                  F-4

        Consolidated Statements of Cash Flows for each of the three years ended December 31, 2001, 2000
        and 1999                                                                                             F-5

        Notes to Consolidated Financial Statements                                                           F-6

                 2.       Financial Statement Schedules of Jameson Inns, Inc.

        Report of Independent Auditors                                                                       F-23

        Schedule III--Real Estate and Accumulated Depreciation                                               F-24

        Notes to Schedule III                                                                                F-27

                 3.       Financial Statements of Kitchin Hospitality, LLC

        Report of Independent Auditors                                                                       F-28

        Consolidated Balance Sheets as of December 31, 2001, and 2000                                        F-29

        Consolidated Statements of Income for each of the three years ended December 31, 2001, 2000 and
        1999                                                                                                 F-30

        Consolidated Statements of Members' Capital (Deficit) for each of the three years ended
        December 31, 2001, 2000 and 1999                                                                     F-31

        Consolidated Statements of Cash Flows for each of the three years ended December 31, 2001, 2000      F-32
        and 1999

        Notes to Consolidated Financial Statements                                                           F-33
</TABLE>

         (b)      Reports on Form 8-K

         Three reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 2001.On October 25, 2001 Jameson filed an 8-K reporting
that on October 24, 2991 Jameson Inns, Inc. issued a press release announcing
that it had entered into multiple agreements to cap interest rate exposure on
approximately $109 million of mortgage indebtedness through October 2003. On
November 16, 2001, Jameson filed an 8-K reporting that on November 14, 2001,
Jameson Inns, Inc. issued a press release announcing its operating results for
the third quarter ended September 30, 2001. On December 14, 2001, Jameson filed
an 8-K reporting that on December 14, 2001, Jameson Inns, Inc. issued a press
release announcing the declaration of dividends on its Series A Preferred Shares
and Series S Preferred Shares for the fourth quarter ended December 31, 2001.

                                       45

<PAGE>

     (c)  1.   The following exhibits are filed as part of this Annual Report or
     incorporated herein by reference:


           Exhibit
           Number    Description
           ------    -----------

               1.1 -- Sales Agency Agreement by and among Jameson
                      Inns, Inc., RGC Brinson Patrick, a division of
                      Ramius Securities, LLC, and Kitchin Hospitality,
                      LLC (formerly Jameson Hospitality, LLC), dated
                      September 3, 1999, incorporated by reference to
                      Exhibit 1.4 to Post-Effective Amendment No. 1 to
                      the Registration Statement on Form S-3, File No.
                      333-20143

               3.1--  Amended and Restated the Articles of Incorporation
                      of the Registrant, as further amended through May 6,
                      1999

               3.2 -- Restated Bylaws of the Registrant

               4.1 -- Specimen certificate of Common Stock
                      incorporated by reference to Exhibit 4.1 to the
                      Company's Registration Statement on Form S-11
                      (File No. 33-71160)

               4.2 -- Specimen certificate of 9.25% Series A
                      Cumulative Preferred Stock incorporated by
                      reference to Exhibit 1 to the Registration
                      Statement on Form 8-A filed March 13, 1998 (File
                      No.000- 23256)

               4.3 -- Specimen certificate of $1.70 Series S
                      Cumulative Convertible Preferred Stock
                      incorporated by reference to Exhibit 1 to the
                      Registration Statement on Form 8-A filed March
                      26, 1999 (File no. 000-23256)

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

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

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

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

                                       46

<PAGE>

               10.5 -- Amendment No. 4 to Master Lease Agreement
                       (relating to Jameson Inns) between Jameson Inns.,
                       Inc. and Jameson Operating Company (revised)
                       incorporated by reference to Exhibit 10.5 to the
                       Annual Report filed on Form 10-K for the year ended
                       December 31, 1997

               10.6 -- Amendment No. 5 to Master Lease Agreement
                       (relating to Jameson Inns) between Jameson Inns.,
                       Inc. and Jameson Alabama, Inc., as lessor, and
                       Jameson Development Company, LLC incorporated by
                       reference to Exhibit 10.6 to the Registration
                       Statement on Form S-4, File No. 333-74149

               10.7 -- Schedule of documents substantially similar
                       to Exhibit 10.1 incorporated by reference to
                       Exhibit 3.7 to the Registration Statement on
                       Form S-4, File No. 333-74149

               10.8 -- Schedule of documents substantially similar
                       to Exhibit 10.6 incorporated by reference by
                       Exhibit 10.8 to the Registration Statement on
                       Form S-4, File No. 333-74149

               10.9 -- Amendment No. 8 to the Master Lease (relating
                       to Jameson Inns) between Jameson Inns, Inc. and
                       Jameson Alabama, Inc. as lessor, and Kitchin
                       Hospitality, LLC, incorporated by reference to
                       Exhibit 10.1 to the Report on Form 10-Q for the
                       quarter ended September 30, 2001

              10.10 -- Schedule of documents substantially similar
                       to 10.9, incorporated by reference to Exhibit
                       10.2 to the Report on Form 10-Q for the quarter
                       ended September 30, 2001

              10.11 -- Amendment No. 9 to the Master Lease (relating to
                       Jameson Inns) between Jameson Inns, Inc. and
                       Jameson Alabama, Inc. as lessor, and Kitchin
                       Hospitality, LLC, incorporated by reference to
                       Exhibit 10.3 to the Report on Form 10-Q for the
                       quarter ended September 30, 2001

              10.12 -- Schedule of documents substantially similar
                       to 10.11, incorporated by reference to Exhibit
                       10.4 to the Report on Form 10-Q for the quarter
                       ended September 30, 2001

              10.13 -- Master Lease Agreement (relating to Signature
                       Inns) incorporated by reference to Exhibit 10.9
                       to the Post-Effective Amendment No. 1 to the
                       Registration Statement on Form S-3, File No.
                       333-20143

              10.14 -- Amendment No. 1 to Master Lease Agreement
                       (relating to Signature Inns) incorporated by
                       reference to Exhibit 10.11 to the Post-Effective
                       Amendment No. 1 to the Registration Statement on
                       Form S-3, File No. 333-20145

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

                                       47

<PAGE>

           10.16 -- Form of Construction Contract between Jameson Inns, Inc. and
                    Kitchin Hospitality, LLC (formerly Jameson Construction
                    Company) for construction of Jameson Inns incorporated by
                    reference to Exhibit 10.7 to the Annual Report on Form 10-K
                    for the year ended December 31, 1995

           10.17 -- 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

           10.18 -- 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

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

           10.20 -- 1994 Amendment to Jameson 1993 Stock Incentive
                    Planincorporated by reference to Exhibit 10.11 to the Annual
                    Report on Form 10-K for the year ended December 31, 1995

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

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

           10.23 -- Jameson 1996 Stock Incentive Plan incorporated by reference
                    to Exhibit 10.45 to the Annual Report on Form 10-K for the
                    year ended December 31, 1995

           10.24 -- Jameson 1997 Director Stock Option Plan incorporated by
                    reference to Exhibit 10.17 to the Annual Report filed on
                    Form 10-K for the year ended December 31, 1997

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

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

           10.27 -- Form of Indemnification agreement between Jameson Inns.,
                    Inc. and Directors and Officers incorporated by reference to
                    Exhibit 10.27 to the Registration Statement on Form S-11,
                    File No. 33-71160

                                       48

<PAGE>

           10.28 -- Form of Construction Loan Agreement, Indenture, Security
                    Agreement and Promissory Note for loan from Empire Financial
                    Services, Inc. to Jameson Inns., Inc. (formerly Jameson
                    Company) for construction of Jameson Inn incorporated by
                    reference to Exhibit 10.39 to the Registration Statement on
                    Form S-11, File No. 33-71160

           10.29 -- Form of Construction Loan Indenture, Security Agreement,
                    Assignment of Fees and Income, Promissory Note for $4.2
                    million revolving loan from Empire Financial Services, Inc.
                    to Jameson Inns., Inc. incorporated by reference to Exhibit
                    10.21 to the Annual Report on Form 10-K for the year ended
                    December 31, 1993

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

           10.31 -- Loan Modification Agreement and Note increasing by $2.6
                    million the revolving loan from Empire Financial Services,
                    Inc. to Jameson Inns., Inc. incorporated by reference to
                    Exhibit 10.26 to the Annual Report on Form 10-K for the year
                    ended December 31, 1995

           10.32 -- Deeds to Secure Debt, Mortgages, Assignments and Security
                    Agreements, Assignment of Rents and Leases, Assignments of
                    Income and Promissory Note for $17,171,717 loan from Bank
                    Midwest, N.A. to Jameson Inns, Inc. secured by 14 separate
                    Jameson Inns incorporated by reference to Exhibit 10.34 to
                    the Registration Statement on Form S-4, File No. 333-74149

           10.33 -- Adjustable Rate Note dated June 30, 1996 in the amount of
                    $1,050,000 from Jameson Inns., Inc. to Empire Financial
                    Services, Inc. for loan on Waynesboro, Georgia incorporated
                    by reference to Exhibit 10.3 to the Report for the quarter
                    ended March 31, 1996

           10.34 -- Term Loan Agreement dated as of December 28, 1999, between
                    Jameson Inns, Inc. and First National Bank & Trust;
                    Mortgage; Security Agreement; Assignment of Rents and
                    Leases; Mortgage Note for $3.7 million incorporated by
                    reference to Exhibit 10.31 to the Annual Report filed on
                    Form 10-K for the year ended December 31, 1999

           10.35 -- Loan Agreement between the City of Elkhart, Indiana and
                    Jameson Inns, Inc. dated as of December 1, 1999, relating to
                    the issuance of $3,305,000 of Adjustable Rate Economic
                    Development Revenue Refunding Bonds, Series 1999; Trust
                    Indenture between City of Elkhart, Indiana and Firstar Bank,
                    N.A. as Trustee, dated as of December 1, 1999; Escrow
                    Deposit Agreement dated December 22, 1999, by and among
                    Jameson Inns, Inc., the City of Elkhart, Indiana, Bank One

                                       49

<PAGE>
                       Trust Company, NA as Escrow Trustee and Bank One Trust
                       Company, NA as Prior Trustee; Specimen Irrevocable Letter
                       of Credit dated December 22, 1999 for the benefit of
                       bondholders for the account of Jameson Inns, Inc.;
                       Reimbursement Agreement between Jameson Inns, Inc. and
                       Firstar Bank, N.A. dated December 22, 1999; Mortgage,
                       Assignment of Rents and Security Agreement from Jameson
                       Inns, Inc. to Firstar Bank, N.A. dated as of December 22,
                       1999; Assignment of Leases and Rents from Jameson Inns,
                       Inc. to Firstar Bank, N.A. dated as of December 22, 1999;
                       Assignment and Subordination of Master Lease by Jameson
                       Inns, Inc. and Kitchin Hospitality, LLC (formerly Jameson
                       Hospitality, LLC) for the benefit of Firstar Bank, N.A.
                       dated as of December 22, 1999; Environmental Indemnity
                       Agreement by Jameson Inns, Inc. to and for the benefit of
                       Firstar Bank, N.A. dated as of December 22, 1999;
                       Agreement with respect to Pledged Bonds by and among
                       Firstar Bank, N.A., as Trustee, Firstar Bank, N.A. as
                       Letter of Credit Bank and Jameson Inns, Inc. dated as of
                       December 1, 1999; Bond Purchase Agreement by and among
                       the City of Elkhart, Indiana, Jameson Inns, Inc. and Banc
                       One Capital Markets, Inc. dated as of December 21, 1999;
                       Remarketing Agreement between Banc One Capital Markets,
                       Inc. and Jameson Inns, Inc. dated as of December 1, 1999
                       incorporated by reference to Exhibit 10.32 to the Annual
                       Report filed on Form 10-K for the year ended December 31,
                       1999

              10.36 -- Schedule of documents substantially similar to Exhibit
                       10.35 incorporated by reference to Exhibit 10.33 to the
                       Annual Report filed on Form 10-K for the year ended
                       December 31, 1999

              10.37 -- Loan Agreement dated as of September 27, 2000, between
                       Jameson Inns, Inc. and Geneva Leasing Associates, Inc.
                       for Signature Inn, Fort Wayne, Indiana; Mortgage,
                       Assignment of Rents, Security Agreement and Financing
                       Statement; and Note for $2,825,000 incorporated by
                       reference to Exhibit 10.38 to the Annual Report on Form
                       10-K for the year ended December 31, 2000

              10.38 -- Loan Agreement dated September 27, 2000, between Jameson
                       Inns, Inc. and Republic Bank, Indianapolis, Indiana for
                       Signature Inn, Indianapolis West; Mortgage, Security
                       Agreement and Fixture Filing; Assignment of Deposits,
                       Leases and Rents; Estoppel Certificate, Subordination and
                       Attonment Agreement; and Promissory Note for $4,745,000
                       incorporated by reference to Exhibit 10.39 to the Annual
                       Report on Form 10-K for the year ended December 31, 2000

              10.39 -- Loan Agreement dated December 27, 2000, between Jameson
                       Properties, LLC and First Bank, Peoria, Illinois for
                       Signature Inn, Normal, Illinois; Mortgage and Security
                       Agreement; Assignment of Leases and Rents; Subordination
                       Agreement; Tenant Estoppel Agreement; Indemnity
                       Agreement; and Promissory Note A for $6,000,000;
                       Promissory Note B for

                                       50

<PAGE>

                       $5,000,000 incorporated by reference to Exhibit 10.40 to
                       the Annual Report on Form 10-K for the year ended
                       December 31, 2000

              10.40 -- Schedule of documents substantially similar to Exhibit
                       10.39 incorporated by reference to Exhibit 10.41 to the
                       Annual Report on Form 10-K for the year ended December
                       31, 2000

              10.41 -- Open-end Mortgage dated May 16, 2001 between Jameson
                       Inns, Inc. and Cornerstone Bank for Signature Inn,
                       Columbus, Ohio; Security Agreement, Equipment, Inventory
                       Receivables; Assignment of Rents as Security; Hazardous
                       Substance Indemnity Agreement; Depository Agreement;
                       Promissory Note for $3,900,000; and Addendum to
                       Promissory Note incorporated by reference to Exhibit
                       10.42 to the Annual Report on Form 10-K for the year
                       ended December 31, 2000

              10.42 -- Real Estate Mortgage dated March 28, 2001 between Jameson
                       Alabama, Inc. and Empire Financial Services, Inc. for
                       Jameson Inn, Tuscaloosa, Alabama; Assignment of Lease;
                       Assignment of Operating Lease; Assignment of Fees and
                       Income; Security Agreement; Adjustable Rate Note for
                       $1,500,000; Unconditional Guaranty of Payment and
                       Performance incorporated by reference to Exhibit 10.43 to
                       the Annual Report on Form 10-K for the year ended
                       December 31, 2000

              10.43 -- Schedule of documents substantially similar to Exhibit
                       10.42 incorporated by reference to Exhibit 10.44 to the
                       Annual Report on Form 10-K for the year ended December
                       31, 2000

              10.44 -- Loan Agreement dated March 8, 2001, between Jameson
                       Properties, LLC and Bank of Louisville, Louisville,
                       Kentucky, for Signature Inn, Louisville East; Mortgage
                       and Security Agreement (Fixture Filing Statement);
                       Assignment of Rents and Leases; Subordination Agreement;
                       Promissory Note for $5,000,000; and Guaranty Agreement of
                       Jameson Inns, Inc.

              10.45 -- Schedule of documents substantially similar to Exhibit
                       10.42

              10.46 -- Schedule of documents substantially similar to Exhibit
                       10.38

              10.47 -- Business Loan Agreement dated March 30, 2001, between
                       Jameson Inns, Inc. and First Midwest Bank, National
                       Association, Moline, Illinois, for Signature Inns,
                       Bettendorf, Iowa; Mortgage; Assignment of Rents;
                       Subordination, Nondisturbance and Attornment Agreement;
                       and Promissory Note for $3,000,000

              10.48 -- Employment Contract with Thomas W. Kitchin dated November
                       29, 2001 incorporated by reference to Exhibit 99(d)(4) to
                       the Schedule TO filed with the SEC on March 20, 2002

              10.49 -- Employment Contract with Craig R. Kitchin dated November
                       29, 2001 incorporated by reference to Exhibit 99(d)(5) to
                       the

                                       51

<PAGE>

                       Schedule TO filed with the SEC on March 20, 2002

              10.50 -- Employment Contract with William D. Walker dated November
                       29, 2001 incorporated by reference to Exhibit 99(d)(6) to
                       the Schedule TO filed with the SEC on March 20, 2002

              10.51 -- Employment Contract with Steven A. Curlee dated November
                       29, 2001 incorporated by reference to Exhibit 99(d)(7) to
                       the Schedule TO filed with the SEC on March 20, 2002

              10.52    Employment Contract with Martin D. Brew dated November
                       29, 2001 incorporated by reference to Exhibit 99(d)(8) to
                       the Schedule TO filed with the SEC on March 20, 2002

               21.1 -- Subsidiaries of the Registrant incorporated by reference
                       to Exhibit 21.1 to the Annual Report on Form 10-K for the
                       year ended December 31, 2000

               23.1 -- Consent of Ernst & Young LLP

                                       52

<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on March 25, 2002.

                                     JAMESON INNS, INC.


                                     By:      /s/ Craig R. Kitchin
                                         ---------------------------------------
                                              Craig R. Kitchin, President

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

<TABLE>
<CAPTION>
                 NAME                                     TITLE                              DATE
                 ----                                     -----                              ----
<S>                                         <C>                                    <C>
/s/ Thomas W. Kitchin                       Chairman of the Board of Directors,    March 25, 2002
------------------------------------        Chief Executive Officer (principal
Thomas W. Kitchin                           executive officer)

/s/ Craig R. Kitchin                        President and Chief Financial          March 25, 2002
------------------------------------        Officer (principal financial officer)
Craig R. Kitchin

/s/ Martin D. Brew                          Treasurer and Corporate Controller     March 25, 2002
------------------------------------        (principal accounting officer)
Martin D. Brew

/s/ Robert D. Hisrich                       Director                               March 25, 2002
------------------------------------
Robert D. Hisrich

/s/ Michael E. Lawrence                     Director                               March 25, 2002
------------------------------------
Michael E. Lawrence

/s/ Thomas J. O'Haren                       Director                               March 25, 2002
------------------------------------
Thomas J. O'Haren
</TABLE>

                                       53

<PAGE>


                         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, 2001 and 2000, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Jameson
Inns, Inc. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

                                                               ERNST & YOUNG LLP

February 10, 2002
Atlanta, Georgia



                                       F-1

<PAGE>

                               Jameson Inns, Inc.
                           Consolidated Balance Sheets
<TABLE>
<CAPTION>


                                                                                December 31
                                                                         2001                 2000
                                                                      ------------         ------------
<S>                                                                   <C>                  <C>
Assets
Operating property and equipment                                      $371,934,704         $365,243,811
Property and equipment held for sale                                     9,813,893            7,171,688
Less accumulated depreciation                                          (51,874,113)         (38,324,641)
                                                                      ------------         ------------
                                                                       329,874,484          334,090,858

Cash                                                                     4,755,991            1,976,592
Restricted cash                                                            648,924              636,126
Receivable from affiliate                                                   87,037                    -
Deferred finance costs, net                                              3,555,207            3,690,409
Other assets                                                               439,553              549,382
                                                                      ------------         ------------
                                                                      $339,361,196         $340,943,367
                                                                      ============         ============

Liabilities and stockholders' equity
Mortgage notes payable                                                $227,062,652         $207,145,362
Accounts payable and accrued expenses                                      467,859              553,443
Payable to affiliate                                                             -            1,038,252
Accrued interest payable                                                 1,381,984            1,461,280
Accrued property and other taxes                                         2,166,105            2,336,416
Preferred stock dividends payable                                        1,667,190            1,667,183
                                                                      ------------         ------------
                                                                       232,745,790          214,201,936

Stockholders' equity:
    Preferred stock, 1,272,727 shares authorized, 9.25%
      Series A cumulative preferred stock, $1 par value,
      liquidation preference $25 per share, 1,272,727 shares
      issued and outstanding                                             1,272,727            1,272,727
    Preferred stock, 2,256,000 shares authorized, 8.5%
      Series S cumulative convertible preferred stock,
      $1 par value, liquidation preference $20 per share,
      2,191,500 shares issued and outstanding                            2,191,500            2,191,500
    Common stock, $.10 par value, 40,000,000 shares
      authorized, 11,729,907 shares (11,554,238 in 2000)
      issued and outstanding                                             1,172,991            1,155,424
    Additional paid-in capital                                         103,005,179          123,148,771
    Retained deficit                                                    (1,026,991)          (1,026,991)
                                                                      ------------         ------------
Total stockholders' equity                                             106,615,406          126,741,431
                                                                      ------------         ------------
                                                                      $339,361,196         $340,943,367
                                                                      ============         ============


</TABLE>

See accompanying notes.


                                       F-2

<PAGE>

                               Jameson Inns, Inc.
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>


                                                                              Year ended December 31
                                                                    2001                2000                1999
                                                                 -----------         -----------         -----------
<S>                                                              <C>                 <C>                 <C>
Lease revenue                                                    $43,610,912         $43,231,727         $34,668,532

Expenses:
    Property and other taxes                                       4,340,345           3,670,841           2,634,056
    Insurance                                                        979,200             869,601             566,351
    Depreciation                                                  19,517,341          14,619,521          10,396,468
    General and administrative expenses                            1,659,421           1,405,343           1,116,520
    (Gain) loss on disposal of real estate                          (902,791)             37,317             755,214
    Gain on sale of land                                            (196,728)           (320,575)                  -
    Amortization of offering costs                                         -             176,281              99,724
    Loss on impairment of real estate                              2,110,000                   -                   -
                                                                 -----------         -----------         -----------
Total expenses                                                    27,506,788          20,458,329          15,568,333
                                                                 -----------         -----------         -----------
Income from operations                                            16,104,124          22,773,398          19,100,199
Interest expense, net of capitalized amounts                      18,864,252          14,942,749           8,429,007
Equity in income of hotel limited partnership                              -                   -              75,462
Other income                                                          32,592              48,085              23,913
                                                                 -----------         -----------         -----------
(Loss) income before extraordinary loss                           (2,727,536)          7,878,734          10,770,567
Extraordinary loss-early extinguishment of debt
                                                                     341,081              87,816                   -
                                                                 -----------         -----------         -----------
Net (loss) income                                                 (3,068,617)          7,790,918          10,770,567
Less preferred stock dividends                                     6,668,739           6,696,144           5,387,248
                                                                 -----------         -----------         -----------
Net (loss) income attributable to common stockholders            $(9,737,356)        $ 1,094,774         $ 5,383,319
                                                                 ===========         ===========         ===========


Per common share:
    (Loss) income before extraordinary loss:
      Basic                                                      $     (0.84)        $       .11         $       .51
      Diluted                                                    $     (0.84)        $       .10         $       .51
    Net (loss) income:
      Basic and diluted                                          $     (0.87)        $       .10         $       .51
</TABLE>



See accompanying notes.



                                       F-3

<PAGE>

                               Jameson Inns, Inc.
                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>

                                          Preferred     Preferred
                                            Stock         Stock        Common        Contributed       Retained        Stockholders'
                                           Series A     Series S        Stock          Capital          Deficit          Equity
                                         -----------   ----------    ----------      ------------     -----------      -------------
<S>                                       <C>          <C>           <C>             <C>              <C>              <C>
Balance at January 1, 1999                $1,200,000   $             $  989,581      $ 97,705,947     $(1,026,991)     $ 98,868,537
   Issuance of preferred and common
     stock, net of offering expense           72,727    2,256,000       117,341        39,585,070               -        42,031,138
   Exercise of stock options                       -            -         1,501           100,302               -           101,803
   Vesting of restricted stock grants              -            -           (28)           67,653               -            67,625
   Common stock dividends ($.97 per
     share)                                        -            -             -        (4,072,307)     (6,077,070)      (10,149,377)
   Preferred stock dividends-Series S
     ($1.70 per share)                             -            -             -                 -      (2,486,112)       (2,486,112)
   Preferred stock dividends -
     Series A ($2.31 per share)                    -            -             -          (693,751)     (2,207,385)       (2,901,136)
   Net income                                      -            -             -                 -      10,770,567        10,770,567
                                          ----------   ----------    -----------     ------------     -----------      ------------
Balance at December 31, 1999               1,272,727    2,256,000     1,108,395       132,692,914      (1,026,991)      136,303,045
   Issuance of common stock, net of
     offering expense                              -            -         7,211           492,658               -           499,869
   Vesting of restricted stock grants              -            -        33,110           271,066               -           304,176
   Conversion of Series S Preferred
     Stock                                         -      (64,500)        6,708          (143,771)              -          (201,563)
   Common stock dividends ($.98 per
     share)                                        -            -             -       (10,164,096)     (1,094,774)      (11,258,870)
   Preferred stock dividends-Series S
     ($1.70 per share)                             -            -             -                 -      (3,557,370)       (3,557,370)
   Preferred stock dividends -
     Series A ($2.31 per share)                    -            -             -                 -      (3,138,774)       (3,138,774)
   Net income                                      -            -             -                 -       7,790,918         7,790,918
                                          ----------   ----------    ----------      ------------     -----------      ------------
Balance at December 31, 2000               1,272,727    2,191,500     1,155,424       123,148,771      (1,026,991)      126,741,431
   Issuance of common stock                        -            -         8,847           659,584               -           668,431
   Vesting of restricted stock grants              -            -         8,720           330,748               -           339,468
   Common stock dividends ($.98 per
     share)                                        -            -             -       (21,133,924)      9,737,356       (11,396,568)
   Preferred stock dividends-Series S
     ($1.70 per share)                             -            -             -                 -      (3,725,558)       (3,725,558)
   Preferred stock dividends -
     Series A ($2.31 per share)                    -            -             -                 -      (2,943,181)       (2,943,181)
   Net loss                                        -            -             -                 -      (3,068,617)       (3,068,617)
                                          ----------   ----------    ----------      ------------     -----------      ------------
Balance at December 31, 2001              $1,272,727   $2,191,500    $1,172,991      $103,005,179     $(1,026,991)     $106,615,406
                                          ==========   ==========    ==========      ============     ===========      ============


</TABLE>

See accompanying note


                                       F-4

<PAGE>


                               Jameson Inns, Inc.
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>


                                                                                        Year ended December 31
                                                                            2001                 2000               1999
                                                                        ------------         ------------        ------------
<S>                                                                     <C>                  <C>                 <C>
Operating activities
Net (loss) income                                                       $ (3,068,617)        $  7,790,918        $ 10,770,567
Adjustments to reconcile net (loss) income to cash
   provided by operating activities:
     Extraordinary loss                                                      341,081               87,816                   -
     Depreciation and amortization                                        20,268,543           15,216,932          10,624,136
     Equity in income of hotel limited partnership                                 -                    -             (75,462)
     Amortization of offering costs                                                -              176,281              99,724
     (Gain) loss on disposal of property and equipment                    (1,099,519)            (283,258)            755,214
     Stock-based compensation expense                                        339,468              304,176              67,625
     Loss on impairment of real estate                                     2,110,000                    -                   -
     Changes in assets and liabilities increasing (decreasing)
       cash:
          Restricted cash                                                    (12,798)          11,980,356             882,592
          Other assets                                                       109,829              511,981            (894,526)
          Accounts payable and accrued expenses                              (85,584)            (715,891)            730,989
          (Payable) to/receivable from affiliate                          (1,125,289)           1,504,057             (46,160)
          Accrued interest payable                                           (79,296)             488,736              (7,893)
          Accrued property and other taxes                                  (170,311)             138,733             295,263
                                                                        ------------         ------------        ------------
Net cash provided by operating activities                                 17,527,507           37,200,837          23,202,069

Investing activities
Acquisition of Signature Inns and billboards, net                                  -                    -              92,092
Proceeds from disposition of land, property and equipment                 14,171,438            2,060,575           1,441,586
Additions to property and equipment                                      (30,482,886)         (53,878,540)        (41,761,690)
                                                                        ------------         ------------        ------------
Net cash used in investing activities                                    (16,311,448)         (51,817,965)        (40,228,012)

Financing activities
Common stock dividends paid                                              (11,396,568)         (11,258,870)        (10,149,377)
Preferred stock dividends paid                                            (6,668,739)          (6,723,556)         (4,386,403)
Proceeds from issuance of preferred and common stock,
   net of offering expense                                                   668,431              499,869             977,230
Proceeds from exercise of stock options                                            -                    -             101,803
Conversion of Series S preferred stock                                             -             (201,563)                  -
Proceeds from mortgage notes payable                                      53,798,529           75,711,945          62,003,310
Payment of deferred finance costs                                           (957,074)          (1,440,533)         (2,001,251)
Payoff of loans                                                          (27,737,431)         (37,236,734)        (27,488,737)
Payments on mortgage notes payable                                        (6,143,808)          (5,287,847)                  -
                                                                        ------------         ------------        ------------
Net cash provided by financing activities                                  1,563,340           14,062,711          19,056,575
                                                                        ------------         ------------        ------------

Net change in cash                                                         2,779,399             (554,417)          2,030,632
Cash at beginning of year                                                  1,976,592            2,531,009             500,377
                                                                        ------------         ------------        ------------
Cash at end of year                                                     $  4,755,991         $  1,976,592        $  2,531,009
                                                                        ============         ============        ============
Supplemental information

Interest paid, net of interest capitalized                              $ 18,280,209         $ 15,258,820        $  8,746,028
                                                                        ============         ============        ============
State income and franchise taxes paid                                   $    369,018         $    213,004        $     16,226
                                                                        ============         ============        ============

</TABLE>

See accompanying notes.


                                       F-5

<PAGE>


                               Jameson Inns, Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2001

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)." In
addition, as a result of the Company's acquisition of Signature Inns, Inc.
("Signature") in May of 1999, the Company owns Inns in the Midwest operating
under the trademark "Signature Inns(R)".

On May 7, 1999, the Company merged with Signature, a limited-service hotel
company based in Indiana with Inns located in Midwestern states. Through the
Signature merger, which was accounted for as a purchase business combination,
the Company acquired 25 wholly-owned Signature Inns (2,978 available rooms) and
a 40% general partnership interest in a limited partnership which owned one
additional Signature Inn (81 available rooms). In December 1999 the Company
acquired the remaining partnership interest in this partnership and took direct
ownership of the hotel.

On April 2, 1999, the Company completed the acquisition of the outdoor
advertising assets and certain related operations of Kitchin Hospitality, LLC
(formerly Jameson Hospitality, LLC) ("KH"). These assets consist of
approximately 100 roadside billboards on which advertising for the Company's
hotel properties and, in certain instances, other services or products for third
parties, is placed.

At December 31, 2001, there were 98 Jameson Inns in operation in nine
Southeastern states and 26 Signature Inns in operation in six Midwestern states,
with a total of 8,355 rooms. In 2002, one additional Jameson Inns will be
developed and four expansions of existing Jameson Inns are scheduled to be
completed.

2. Accounting Policies

The Company has several business relationships with KH, including contracts to
construct the new Inns (see Note 9), the lease to operate the Inns (see Note 5)
and the lease to use the billboards for advertising. KH is wholly-owned by
Thomas W. Kitchin, chairman and chief executive officer of the Company, and
members of his family.

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



                                       F-6

<PAGE>

Use of Estimates

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

Reclassifications

Certain amounts in the 2000 and 1999 financial statements have been reclassified
to conform to the 2001 presentation.

Property and Equipment

Costs incurred to acquire and open new Inn locations or to expand or renovate
existing Inns are capitalized as property costs and amortized over their
depreciable life. The Company also capitalizes construction period interest
costs and real estate taxes. Interest costs of $490,411 and $1,686,879, were
capitalized in 2001 and 2000, respectively.

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

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 in the consolidated
statements of operations. Accumulated amortization totaled $1,487,577 and
$963,600 as of December 31, 2001 and 2000, respectively.

Income Taxes

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


                                       F-7

<PAGE>

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.

See Note 6 for pro forma disclosures using the fair value method as described in
Financial Accounting Standards Board Statement No. 123, Accounting and
Disclosure for Stock-Based Compensation ("FAS 123").

Financial Instruments

The Company considers its cash, restricted cash and mortgage notes payable to
meet the definition of financial instruments as prescribed by Financial
Accounting Standards Board Statement No. 107, Disclosures about Fair Value of
Financial Instruments. At December 31, 2001 and 2000, the carrying value of the
Company's financial instruments approximated their fair value.

Restricted Cash

At December 31, 2001, the restricted cash balance is restricted under the
requirements of various mortgage loan agreements.

Principles of Consolidation

Intercompany transactions among the entities included in the consolidated
financial statements have been eliminated. As of December 31, 2001, the Company
had one wholly-owned and two 99.8%-owned qualified real estate investment trust
subsidiaries. Various companies wholly-owned by the Company's Chairman and CEO
and members of his family own the remaining 0.2% of these two subsidiaries.

For 1999, the equity in income in hotel limited partnership represents the
Company's 40% general partnership interest in the Carmel, Indiana Signature Inn
limited partnership. The investment was accounted for using the equity method of
accounting whereby the Company recorded its proportionate share of the
partnership's income. On December 28, 1999, the Company purchased the remaining
60% partnership interest.

Revenue Recognition

The Company recognizes lease revenues when they are earned.


                                       F-8

<PAGE>

Earnings Per Share

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

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

Diluted earnings per share is calculated using weighted average shares
outstanding plus the dilutive effect of outstanding shares of Preferred Stock,
outstanding restricted shares of Common Stock and outstanding stock options,
using the treasury stock method and the average stock price during the period.
For all periods presented, the potential conversion of the Convertible Series S
Preferred Stock has been excluded from the dilutive earnings per share
calculation as the effects of redemption would be antidilutive.

Recent Accounting Pronouncements

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

In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"). Under SFAS No. 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually for impairment. The Company's adoption of the standard on
January 1, 2002, will have no effect to the Company's financial statements.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144").
SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 requires that
long-lived assets to be disposed of by sale, including those of discontinued
operations, be measured at the lower of carrying amount or fair value less cost
to sell, whether reported in continuing operations or in discontinued
operations. Discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet been incurred.
SFAS No. 144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished from the
rest of the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. The Company adopted the standard on
January 1, 2002 and is evaluating what impact, if any, SFAS No. 144 will have on
its consolidated financial statements.


                                       F-9

<PAGE>

3. Property and Equipment

Property and equipment consists of the following at December 31:

<TABLE>
<CAPTION>


                                                                  2001                  2000
                                                              ------------          ------------
        <S>                                                   <C>                   <C>
        Land and improvements                                 $ 57,031,361          $ 58,922,401
        Buildings                                              261,929,180           253,407,237
        Furniture, fixtures and equipment                       47,433,597            42,816,001
        Billboards                                               2,779,505             2,783,076
        Construction in process                                  2,761,061             7,315,096
                                                              ------------          ------------
        Operating property and equipment                       371,934,704           365,243,811
        Property and equipment held for sale                     9,813,893             7,171,688
        Accumulated depreciation                               (51,874,113)          (38,324,641)
                                                              ------------          ------------
                                                              $329,874,484          $334,090,858
                                                              ============          ============
</TABLE>


The Company recognizes impairment losses on long-lived assets used in operations
or held for sale 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. During 2001, impairment losses of $2,110,000 were recognized.
No impairment losses were recorded in 2000 or 1999.

During 2001, the Company considered disposing of some of its 40-room, exterior
corridor Jameson Inn hotels and several Signature Inn hotels located in markets
that have mostly been under-performing. During 2001, the Company sold eleven
properties that did not meet its investment criteria, resulting in net gains of
$903,000. Additionally, a tract of land was sold in 2001 resulting in a gain of
$197,000.

Based on a review of its investment portfolio at December 31, 2001, the Company
has determined that five additional operating hotel properties do not meet its
investment criteria. Accordingly, the Company has decided to sell the properties
and therefore the properties are classified as held for sale in the accompanying
balance sheet. In addition, the Company owns several parcels of land mainly
adjacent to operating Inns which are held for sale. The hotel properties and
parcels of land held for sale are recorded at the lower of cost or fair value
less anticipated selling costs. The 2001 impairment charge of $2,110,000
includes a reserve of $767,370 related to these properties at December 31, 2001.



                                       F-10

<PAGE>


4. The Leases

The Company has entered into master leases, whereby all of the operating Inns
are leased to KH. Therefore, all of the lease revenue is derived from these
leases.

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

Percentage Rent is payable quarterly and is calculated as a percentage in excess
of Base Rent of the total amount of room rental and other miscellaneous revenues
realized by KH during the relevant period. For Jameson Inns, the percentage is
39% of such revenues up to $22.65 per day per room in 2001, plus 65% of all
additional average daily room rental revenues. For Signature Inns, the
percentage is 37% of such revenues up to $38.00 per day per room in 2001, plus
65% of the next $10.00 of average daily per room rental revenues; plus 70% of
all additional average daily room rental revenues.

Total rent for the Jameson Inns in any calendar year may not exceed 47% of total
room rental revenues for that year. The $22.65 and $38.00 per room amount, for
Jameson Inns and Signature Inns, respectively, used in calculating percentage
rent is subject to adjustment each year based on changes in the Consumer Price
Index and as of January 1, 2002 was $23.01 and $38.61 for Jameson Inns and
Signature Inns, respectively.

Base rent totaled $31,279,152, $28,900,248 and $20,998,053 in 2001, 2000 and
1999, respectively, and assuming no change in rooms available after December 31,
2001, the base rent for 2002 and thereafter would total $31,215,528 per year
until the Leases expire.

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



                                       F-11

<PAGE>

5. Mortgage Notes Payable

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


<TABLE>
<CAPTION>
                                                                                     2001                2000
                                                                                  ------------        ------------
Notes payable:
<S>                                                                               <C>                  <C>

   Terms ranging from four to twenty-one years, due in monthly installments of
     principal and interest with remaining unpaid balances payable at maturity,
     which range from 2002 to 2019. Interest rates are adjusted annually and
     range from 4.75% to 10.0% and are mainly adjustable to a spread above the
     prime rate or Treasury securities at December 31, 2001. Secured by
     mortgages on 99 Inns.                                                        $196,714,053        $176,976,601

   Term of twenty years and interest accrues at 3.75% above a weekly average
     yield on Treasury securities, adjusted annually (9.84% at December 31,
     2001). Principal and interest payments are due monthly through maturity in
     2019. At December 31, 2001 the Company had $1.68 million of availability.
     Secured by mortgages on 12 Inns.                                               16,528,756          16,427,808

   Terms of seventeen years due in annual installments of principal and monthly
     installments of interest with any unpaid balances payable in December 2016.
     Interest rates are adjusted weekly and were 2.0% at December 31, 2001.
     Secured by mortgages on 4 Inns.                                                11,475,000          11,805,000

   Term of five years due in monthly installments of principal
     and interest with unpaid balance payable at maturity in
     December 2004. Interest rate is fixed at 9.50%. Secured by Company
     billboards.                                                                       422,318             531,924

Lines of credit:

   $1.6 million line of credit secured by Company billboards. At December 31,
     2001, the Company had $1.58 million available to borrow. The line bears
     interest at prime plus 1/2% with a floor of 6% and cap of 8% (6% at
     December 31, 2001). Payments of interest are due monthly with the principal
     balance payable upon maturity in December 2001.                                    23,614              23,086

Construction obligations:

   $5.9 million total commitments. As of December 31, 2001, $4.0 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 using a 20-year amortization period until maturity
     in 2006 and 2007. Interest rates are adjusted annually to the then
     prevailing prime rate plus .125% to .375%. Interest rates at December 31,
     2001 ranged from 7.125% to 9.375%. Secured by 1 Inn and 2 expansions
     under construction.                                                             1,898,911           1,380,943
                                                                                  ------------        ------------
                                                                                  $227,062,652        $207,145,362
                                                                                  ============        ============


</TABLE>



                                       F-12

<PAGE>


At December 31, 2001 and 2000, approximately $330.0 million and $333.0 million,
respectively, of the Company's net book value of its investment in properties
collateralized the mortgage notes payable. At December 31, 2001 and 2000, 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, 2001:

    2002                                                     $  7,568,061
    2003                                                       11,376,082
    2004                                                       18,827,852
    2005                                                       46,322,110
    2006 and thereafter                                       142,968,547
                                                             ------------
                                                             $227,062,652
                                                             ============

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

During 2001, the Company entered into multiple interest rate cap agreements to
eliminate its exposure to increases in interest rates on $109 million of its
total outstanding indebtedness. These interest rate cap agreements limit the
exposure to increases in the prime rate above specified cap rates for one-year
periods commencing on the interest rate readjustment dates. The agreements do
not prevent the Company from benefiting from further decreases, if any, in the
prime rate.

     Adjustment Date                 Debt Amount           Cap Rate
     ---------------                 ------------          --------
      April 1, 2002                  $ 38,000,000            5.75%
      July 1, 2002                     53,000,000            6.25%
      October 1, 2002                  18,000,000            6.25%
                                     ------------
      Total                          $109,000,000
                                     ============

The Company will receive cash payments from the issuer of the interest rate cap
agreements if the prime rate exceeds 5.75% on April 1, 2002, or 6.25% on July 1,
2002 or October 1, 2002. The amount of the payments, if any, will be recorded as
a reduction to interest expense. The costs of the interest rate cap agreements
(approximately $109,000) will be recognized as interest expense over the life of
the agreements.



                                       F-13

<PAGE>

6. Stockholders' Equity

Preferred Stock

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

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

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

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

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

Upon the occurrence of a Change of Control Event, as defined, at any time prior
to March 18, 2003, the Company may redeem all of the outstanding Series A
Preferred Stock at a purchase price ranging from $25.05 to $26.05 per share
(depending on the date of the redemption), plus accrued and unpaid dividends (if
any) to the date of redemption. Except in certain circumstances relating to
preservation of the Company's status as a REIT and in connection with a change
of control of the Company, the Series A Preferred Stock is not redeemable prior
to March 18, 2003. On and after such date, the Series A Preferred stock will be
redeemable for cash at the option of the Company, in whole or in part, at a
redemption price of $25 per share, plus dividends accrued and unpaid to the
redemption date (whether or not declared) without interest.


                                       F-14

<PAGE>

Stock Options

The Company has four stock option plans. The Company adopted the 1993 Stock
Incentive Plan ("1993 Plan") to provide incentives to attract and retain
officers and key employees of both the Company and KH. This Plan provides for a
number of shares equal to 10% of the Company's outstanding common shares
(excluding shares issued pursuant to exercises of options granted under this
Plan). In 1996, the Jameson 1996 Stock Incentive Plan ("1996 Plan") was adopted
and 500,000 additional shares were reserved for issuance. As of December 31,
2001 the Company had a total of 1,422,379 shares reserved for issuance,
including 100,942 shares available for future option grants or restricted stock
grants under the 1993 and 1996 Plans.

The Director Stock Option Plan ("1995 Director Plan") reserved 150,000 shares of
Common Stock to attract and retain qualified independent directors. This plan
provides that, upon election to the Board of Directors, each director will
receive options to purchase 25,000 shares of common stock at the then current
market price; such options are fully vested upon issuance.

In addition, the Company adopted the 1997 Director Stock Option Plan ("1997
Director Plan") which reserved 200,000 shares of Common Stock and provides that
at 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, 2001, a total of 350,000
options are reserved for issuance under the 1995 Director Plan and the 1997
Director Plan, including 215,000 options available for future option grants.



                                       F-15

<PAGE>

A summary of the stock option activity follows:

<TABLE>
<CAPTION>


                                                                                              Weighted
                                                     Number               Range of             Average
                                                       of              Exercise Price       Exercise Price
                                                     Shares             Per Share             Per Share
                                                   ---------       --------------------     --------------
<S>                                                <C>             <C>          <C>         <C>
Options outstanding December 31, 1998                848,114       $6.65    -   $11.75          $10.04
    Granted in 1999                                  231,835       $7.125   -   $ 9.75          $ 7.91
    Exercised in 1999                                (14,758)      $6.65    -   $ 7.25          $ 7.11
    Forfeited in 1999                               (175,220)      $7.25    -   $11.75          $11.03
                                                   ---------
Options outstanding December 31, 1999                889,971       $6.65    -   $11.75          $ 9.38
                                                   ---------
    Granted in 2000                                  130,500       $6.94    -   $ 7.25          $ 7.07
    Exercised in 2000                                      -       $   -    -   $    -          $    -
    Forfeited in 2000                                (99,750)      $7.00    -   $11.75          $ 9.06
                                                   ---------
Options outstanding December 31, 2000                920,721       $6.94    -   $11.75          $ 9.02
                                                   ---------
    Granted in 2001                                  210,000       $3.30    -   $ 7.29          $ 3.59
    Exercised in 2001                                      -       $   -    -   $    -          $    -
    Forfeited in 2001                               (111,288)      $6.65    -   $11.63          $ 8.86
                                                    --------
Options Outstanding December 31, 2001              1,019,433       $3.30    -   $11.75          $ 5.47
                                                   =========

Options Exercisable
    Granted prior to 1999                            524,666       $6.65    -   $11.75          $ 9.35
    Granted in 1999                                   53,667       $7.125   -   $ 9.13          $ 7.86
    Granted in 2000                                   22,100       $6.94    -   $ 7.188         $ 7.05
    Granted in 2001                                   15,000       $7.29    -   $ 7.29          $ 7.29

</TABLE>

The average contractual life remaining on options outstanding at December 31,
2001 was 6.82 years.

Restricted Stock

In 2001, the Company awarded 92,500 shares of common stock to certain officers
and employees of the Company, under the provisions of the 1993 Plan. The shares
vest over a ten year period with no vesting until the third anniversary of the
grant, at which time the grants will be vested 30%, on each succeeding
anniversary an additional 10% will vest, assuming the individual is continuously
employed by the Company on each vesting date.

In 2000 and 1999, the Company awarded 334,500 and 4,750, shares, respectively of
Common Stock to certain officers and employees of the Company, under the
provisions of the 1996 Plan. The shares vest ten years after date of grant,
assuming the individual is continuously employed by the Company at that date.

Holders are entitled to all dividends prior to forfeiture or full vesting under
these plans. As of December 31, 2001, 502,570 restricted shares of common stock
remain outstanding under the 1993 and 1996 Plans.



                                       F-16

<PAGE>

Compensation expense resulting from the stock award is calculated as the fair
value of the restricted shares at the date of grant based on the market price at
date of grant; and is being recorded over the ten-year vesting period using the
straight line method, net of forfeitures. The expense recorded was $339,468 in
2001, $304,176 in 2000 and $67,625 in 1999.

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
2001, 2000 and 1999; risk-free interest rates of 4.10% to 6.80%; a dividend
yield of 5.18%, 10% and 8%, respectively; a volatility factor of the expected
market price of the Company's Common Stock of .199, .151, and .196,
respectively; and an expected life of the option of 3 to 10 years.

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

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

<TABLE>
<CAPTION>


                                                                         2001          2000        1999
                                                                       -------         -----      ------
  <S>                                                                  <C>             <C>        <C>
  Pro forma net (loss) income (in 000's)                               $(9,844)        $989       $5,310
  Pro forma (loss) earnings per share-basic and diluted                $  (.88)        $.09       $  .50

</TABLE>


Dividend Reinvestment Plans

In April 1995, the Company registered 200,000 shares of common stock for
purchase under the Dividend Reinvestment and Stock Purchase Plan. In 2001, we
registered an additional 200,000 shares of our common stock. These plans allow
existing shareholders to reinvest their dividends in additional shares purchased
at a 5% discount from the average market price of the shares. The plans also
allow existing shareholders to make additional cash purchases at the current
market price of common stock of up to $5,000 per calendar quarter. During 2001,
2000 and 1999, 87,632, 72,102 and 60,459, shares, respectively, were purchased
through dividend reinvestments and additional cash purchases. At December 31,
2001, 115,950 shares were available for purchase under the 2001 plan.


                                       F-17

<PAGE>

7. Earnings Per Share

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

<TABLE>
<CAPTION>


                                                                  2001                 2000                 1999
                                                              -----------           -----------          -----------
<S>                                                           <C>                   <C>                 <C>
Numerator
(Loss) income before extraordinary loss                       $(2,727,536)          $ 7,878,734          $10,770,567
Extraordinary loss                                               (341,081)              (87,816)                   -
                                                              -----------           -----------          -----------
Net (loss) income                                              (3,068,617)            7,790,918           10,770,567
Preferred stock dividends                                      (6,668,739)           (6,696,144)          (5,387,248)
                                                              -----------           -----------          -----------
Numerator for basic (loss) earnings per share-income
   available to common stockholders                           $(9,737,356)          $ 1,094,774          $ 5,383,319
                                                              ===========           ===========          ===========

Denominator
Weighted average shares outstanding                            11,657,387            11,488,104           10,628,980
Less:  Unvested restricted shares                                (481,188)             (406,937)             (85,685)
                                                              -----------           -----------          -----------
Denominator for basic earnings per share                       11,176,199            11,081,167           10,543,295

Plus:  Effect of dilutive securities:
   Employee and director stock options                                  -                 6,323               46,849
   Unvested restricted shares                                           -               363,765               67,402
                                                              -----------           -----------          -----------
Total dilutive potential common shares                                  -               370,088              114,251
                                                              -----------           -----------          -----------
Denominator for diluted earnings per share-adjusted
   weighted average shares and assumed conversions             11,176,199            11,451,255           10,657,546
                                                              ===========           ===========          ===========


Basic (Loss) Earnings Per Common Share
(Loss) income before extraordinary loss                       $     (0.84)          $       .11           $       .51
Extraordinary loss                                                  (0.03)                 (.01)                    -
                                                              -----------           -----------           -----------
Net (loss) income                                             $     (0.87)          $       .10           $       .51
                                                              ===========           ===========           ===========

Diluted (Loss) Earnings Per Common Share
(Loss) income before extraordinary loss                       $     (0.84)          $       .10           $       .51
Extraordinary loss                                                  (0.03)                    -                     -
                                                              -----------           -----------           -----------
Net (loss) income                                             $     (0.87)          $       .10           $       .51
                                                              ===========           ===========           ===========

</TABLE>

Options to purchase 484,433, 522,471 and 521,833, shares of Common Stock during
2001, 2000 and 1999, respectively, were all outstanding but were not included in
the computation of diluted earnings per share because the securities' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive. Additionally, for all periods
presented, the potential conversion of the Series S Preferred Stock was not
included in the computation of diluted earnings per share as the effect of
conversion would be antidilutive.



                                       F-18

<PAGE>

8. Income Taxes

The Company recorded no provision for federal income taxes in 2001, 2000 and
1999 due to its REIT status. State tax expense, totaling $369,018 at December
31, 2001, is included in property and other tax expense. At December 31, 2001,
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 $.98, $.98 and
$.97, per share in 2001, 2000 and 1999, respectively. Of these dividends, $0,
$.35 and $.48, per share represents ordinary income and $.98, $.63 and $.49 per
share represents return of capital in 2001, 2000 and 1999, respectively.

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

Reconciliation between GAAP net income and taxable income (Unaudited)

The following table reconciles GAAP net income to taxable income for the years
ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>


                                                                    2001               2000                1999
                                                             -----------------------------------------------------------
<S>                                                          <C>                    <C>                 <C>

GAAP net (loss) income                                           $  (3,068,617)     $   7,790,918       $ 10,770,567
Add book depreciation and amortization                              19,517,341         14,619,521         10,396,468
Less tax depreciation and amortization                             (18,313,646)       (18,011,233)       (13,825,724)
Book/tax difference on gains/losses from
   capital transactions                                             (1,005,745)                 -         (1,252,732)
Other book/tax differences, net                                      1,216,541           (129,132)          (626,732)
                                                             -----------------------------------------------------------
Adjusted taxable (loss) income subject to 90%
  dividend requirements                                          $  (1,654,126)     $   4,270,074      $   5,461,847
                                                             ===========================================================

</TABLE>






                                       F-19

<PAGE>

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

The following table reconciles cash dividends paid with the dividends paid
deduction for the years ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>


                                                                     2001               2000                1999
                                                           -----------------------------------------------------------
<S>                                                        <C>                      <C>                <C>

Cash dividends paid                                             $ 18,065,307        $17,955,014        $15,536,625
Less dividends designated return of capital                      (11,563,294)        (7,279,985)        (5,167,048)
Other                                                                (17,632)                 -                  -
                                                           -----------------------------------------------------------
Dividends paid deduction                                       $   6,484,381        $10,675,029        $10,369,577
                                                           ===========================================================
</TABLE>

Characterization of Distributions (Unaudited)

The following table characterizes distributions paid per common and preferred
share for the years ended December 31, 2001, 2000, and 1999:

<TABLE>
<CAPTION>

                                               2001                         2000                         1999
                                  ----------------------------------------------------------------------------------------
                                           $               %               $           %               $             %
                                  ----------------------------------------------------------------------------------------
<S>                                   <C>              <C>           <C>             <C>           <C>           <C>

Common Stock

Ordinary income                       $          -          -       $  3,975,344     35.34%       $  4,982,718   49.09%
Return of capital                       11,396,576     100.00%         7,279,985     64.66%          5,167,048   50.91%
                                  ----------------------------------------------------------------------------------------
Total                                  $11,396,576     100.00%       $11,255,329    100.00%        $10,149,766  100.00%
                                  ========================================================================================

Preferred Stock

Ordinary income                       $  6,502,013      97.50%      $  6,699,685    100.00%       $  5,386,859  100.00%
Return of capital                          166,718       2.50%                 -         -                   -       -
                                  ----------------------------------------------------------------------------------------
Total                                 $  6,668,731     100.00%      $  6,699,685    100.00%       $  5,386,859  100.00%
                                  ========================================================================================

</TABLE>


                                       F-20

<PAGE>

9. Additional Related Party Transactions

KH identifies sites and constructs the Inns for the Company. The Company paid KH
a total of $29,116,981, $61,082,972 and $27,342,000 for construction of new
Inns, Inn expansions, and renovations during the years ended December 31, 2001,
2000 and 1999, respectively.

The Company shares employees and office space with KH, which is wholly owned by
Thomas W. Kitchin, the Company's chairman and chief executive officer, and his
family. Under the Cost Reimbursement Agreement, KH charged the Company
approximately $875,000, $962,000 and $417,000 for its allocation of salary,
office overhead, and other general and administrative costs in 2001, 2000 and
1999, respectively. The Company expensed approximately $806,000, $564,000 and
$402,000 of the allocated costs in 2001, 2000 and 1999, respectively.

10. Other Commitments and Contingencies

As of December 31, 2001, the Company had executed or expected to execute
construction contracts with KH, for new Inns or expansions totaling $7.4
million, of which $4.6 million had not been expended.

The Company leases office space, land underlying certain of its Inns which are
built or under construction and land for each billboard location for terms of
five or ten years. Lease expense of $232,862, $245,900 and $101,500, in 2001,
2000 and 1999, respectively, is included in general and administrative expense
in the Company's statements of operations. The leases require future minimum
payments as follows:

      2002                                       $  470,929
      2003                                          275,404
      2004                                          210,006
      2005                                          210,006
      2006                                          150,466
      Thereafter                                  1,454,622
                                                -----------
                                                 $2,771,433
                                                 ==========

The rent expense under the office lease is paid by KH and is allocated under the
Cost Reimbursement agreement described in Note 9.

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-21

<PAGE>


11. Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000:
<TABLE>
<CAPTION>


                                                                   2001 Quarters
                                           ---------------------------------------------------------------
                                                First          Second         Third           Fourth
                                           ---------------------------------------------------------------
<S>                                          <C>              <C>           <C>            <C>

Lease revenue                                 $10,763,976    $11,650,990    $11,361,370     $ 9,834,484
Net (loss) income                                (840,434)      1,024,363      (379,427)     (2,859,316)
Loss per common share:
     Basic and diluted                               (.23)           (.06)         (.18)           (.40)

                                                                   2000 Quarters
                                           ---------------------------------------------------------------
                                                First          Second         Third           Fourth
                                           ---------------------------------------------------------------

Lease revenue                                  $9,109,277     $11,682,167   $12,219,244     $10,221,039
Net income                                      1,312,369       3,186,855     3,078,758         212,936
Loss per common share:
     Basic                                           (.03)            .14           .13            (.13)
     Diluted                                         (.03)            .13           .12            (.13)
</TABLE>


Quarterly (loss) 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-22

<PAGE>


                           REPORT OF INDEPENDENT AUDITORS


The Board of Directors
Jameson Inns, Inc.

We have audited the consolidated financial statements of Jameson Inns, Inc. as
of December 31, 2001 and 2000, and for each of the three years in the period
ended December 31, 2001, and have issued our report thereon dated February 10,
2002 (included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule in item 14(a) of this Annual Report on
Form 10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, 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 10, 2002


                                       F-23

<PAGE>
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 2001
<TABLE>
<CAPTION>

                                                                             Cost Capitalization
                                              Initial Cost                Subsequent to Acquisition
                                       --------------------------         -------------------------
                                                       Buildings,                       Buildings,
                         Mortgage                     Equipment &                       Equipment &
  Property                 Debt           Land       Improvements         Land         Improvements
  --------             ------------    -----------   ------------         --------     ------------
<S>                    <C>             <C>           <C>                  <C>          <C>
Alabama:
  Albertville          $  1,260,000    $   174,000   $          -         $    418     $  1,170,612
  Alexander City          1,550,243        160,086              -                -        1,839,896
  Arab                    1,120,000        131,554              -                -        1,164,993
  Auburn                  1,120,000        227,000              -                -        1,412,550
  Bessemer                1,789,599        327,192              -                -        2,337,358
  Decatur                 1,530,398        201,629              -                -        2,160,941
  Eufaula                 1,020,253        228,869              -            5,575        1,310,436
  Florence                1,788,128        313,579              -            1,202        1,957,160
  Greenville                888,324        228,511              -                -        1,547,164
  Jasper                  1,498,164        225,633              -                -        2,292,983
  Oxford                  1,150,890        307,635              -             (340)       1,442,393
  Ozark                     735,815        176,148              -                -        1,208,892
  Prattville              1,603,503        319,736              -                -        2,301,451
  Scottsboro              1,697,688        324,732              -                -        2,443,602
  Selma                   1,436,980        143,812              -           22,773        2,003,678
  Sylacauga               1,850,000        224,476              -                -        2,467,903
  Trussville              1,464,308        425,438              -            1,377        2,305,451
  Tuscaloosa                832,283              -              -                -        1,492,009

Florida:
  Crestview               1,901,221        471,426              -               10        3,108,744
  Jacksonville            2,663,734        679,519              -            1,448        4,437,820
  Lake City               1,768,225        391,456              -                -        3,107,294
  Lakeland                2,246,758        618,636              -                -        3,759,321
  Ormond Beach            2,188,068        497,099              -           10,859        3,757,251
  Palm Bay                2,383,694        418,745              -              (11)       3,749,281

Georgia:
  Albany                  1,217,005        265,344              -           92,308        1,933,993
  Americus                1,043,295        131,629              -           72,297        2,650,283
  Bainbridge              1,314,001        125,000              -                -        1,741,729
  Brunswick               1,544,171        175,275              -                -        1,741,344
  Calhoun                 1,444,052        113,722              -           18,008        1,769,932
  Carrollton              2,078,614        225,000              -           50,029        1,790,518
  Conyers                 1,714,767        301,128              -                -        2,306,670
  Dalton                  1,695,264        546,257              -            1,550        2,292,360
  Douglas                   965,926        120,033              -                -        1,228,264
  Dublin                    854,835              -              -                -        1,466,428
  Eastman                   630,474         87,883              -           13,917        1,506,404
  Fitzgerald                861,595        133,515              -                -        1,173,855
  Jesup                   1,549,957         89,917              -           14,239        2,147,771
  Kingsland               1,030,917        283,432              -                -        1,462,863
  Lagrange                1,941,649        200,073              -                -        2,041,579
  Macon                   1,077,741        288,518              -                -        1,421,401
  Newnan                  2,206,515        529,377              -           1,006         3,793,713
  Perry                   1,075,598        238,325              -                -        1,435,504
  Pooler                  1,689,570        501,223              -                -        3,126,011
  Rome                    2,309,818        254,849              -                -        3,782,453
  Thomaston               1,452,870        157,181              -          (50,110)       2,148,580
  Thomasville             1,095,941        331,161              -                -        1,550,957
  Valdosta                1,447,934        166,632              -                -        1,655,739
  Warner Robins           1,796,026        365,853              -                -        2,084,947
  Waycross                1,549,950         87,000              -           13,777        2,121,406

</TABLE>


<TABLE>
<CAPTION>

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

<S>                         <C>           <C>             <C>              <C>            <C>       <C>           <C>
Alabama:
  Albertville               $   174,418   $  1,170,612    $  1,345,030     $   358,255       1994        1994         (e)
  Alexander City                160,086      1,839,896       1,999,982         531,539       1994        1994         (e)
  Arab                          131,554      1,164,993       1,296,547         328,811       1995        1995         (e)
  Auburn                        227,000      1,412,550       1,639,550         309,334       1996        1997         (e)
  Bessemer                      327,192      2,337,358       2,664,550         288,864       1998        1999         (e)
  Decatur                       201,629      2,160,941       2,362,570         466,965       1995        1996         (e)
  Eufaula                       234,444      1,310,436       1,544,880         343,497       1995        1996         (e)
  Florence                      314,781      1,957,160       2,271,941         507,038       1995        1996         (e)
  Greenville                    228,511      1,547,164       1,775,675         333,950       1996        1996         (e)
  Jasper                        225,633      2,292,983       2,518,616         483,146       1997        1997         (e)
  Oxford                        307,295      1,442,393       1,749,689         350,749       1996        1997         (e)
  Ozark                         176,148      1,208,892       1,385,040         361,102       1994        1995         (e)
  Prattville                    319,736      2,301,451       2,621,187         285,410       1998        1998         (e)
  Scottsboro                    324,732      2,443,602       2,768,334         289,765       1998        1998         (e)
  Selma                         166,585      2,003,678       2,170,263         677,344       1991        1992         (d)
  Sylacauga                     224,476      2,467,903       2,692,379         360,149       1997        1997         (e)
  Trussville                    426,815      2,305,451       2,732,266         378,723       1997        1998         (e)
  Tuscaloosa                                 1,492,009       1,492,009         343,220       1996        1997         (e)

Florida:
  Crestview                     471,436      3,108,744       3,580,179         403,565       1998        2000         (e)
  Jacksonville                  680,967      4,437,820       5,118,787         576,580       1998        2000         (e)
  Lake City                     391,456      3,107,294       3,498,750         369,861       1998        1999         (e)
  Lakeland                      618,636      3,759,321       4,377,957         395,293       1999        2000         (e)
  Ormond Beach                  507,958      3,757,251       4,265,208         505,769       1998        2000         (e)
  Palm Bay                      418,735      3,749,281       4,168,016         323,541       1999        2000         (e)

Georgia:
  Albany                        357,652      1,933,993       2,291,645         531,509       1994        1995         (e)
  Americus                      203,926      2,650,283       2,854,208         926,400       1991        1992         (d)
  Bainbridge                    125,000      1,741,729       1,866,729         504,311       1994        1994         (e)
  Brunswick                     175,275      1,741,344       1,916,619         452,871       1994        1995         (e)
  Calhoun                       131,730      1,769,932       1,901,662         669,103       1988        1988         (d)
  Carrollton                    275,029      1,790,518       2,065,547         500,220       1993        1994         (e)
  Conyers                       301,128      2,306,670       2,607,798         484,143       1996        1996         (e)
  Dalton                        547,807      2,292,360       2,840,167         326,742       1998        1998         (e)
  Douglas                       120,033      1,228,264       1,348,296         345,410       1995        1995         (e)
  Dublin                              -      1,466,428       1,466,428         372,243       1997        1997         (e)
  Eastman                       101,800      1,506,404       1,608,204         638,753       1989        1989         (d)
  Fitzgerald                    133,515      1,173,855       1,307,370         361,176       1993        1994         (e)
  Jesup                         104,156      2,147,771       2,251,927         878,950       1990        1990         (d)
  Kingsland                     283,432      1,462,863       1,746,295         282,765       1997        1998         (e)
  Lagrange                      200,073      2,041,579       2,241,652         491,156       1995        1996         (e)
  Macon                         288,518      1,421,401       1,709,919         308,364       1997        1997         (e)
  Newnan                        530,383      3,793,713       4,324,096         280,137       1998        2000         (e)
  Perry                         238,325      1,435,504       1,673,829         298,858       1997        1998         (e)
  Pooler                        501,223      3,126,011       3,627,234         327,690       1998        2000         (e)
  Rome                          254,849      3,782,453       4,037,302         477,390       1998        1999         (e)
  Thomaston                     107,071      2,148,580       2,255,651         833,288       1990        1990         (d)
  Thomasville                   331,161      1,550,957       1,882,118         259,545       1998        1998         (e)
  Valdosta                      166,632      1,655,739       1,822,371         508,144       1994        1995         (e)
  Warner Robins                 365,853      2,084,947       2,450,800         487,075       1997        1997         (e)
  Waycross                      100,777      2,121,406       2,222,183         686,535       1992        1993         (e)

</TABLE>

                                      F-24

<PAGE>
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 2001
<TABLE>
<CAPTION>

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

Illinois:
 Normal                   4,678,566      1,076,916      5,163,743                -          324,988
 Peoria                   4,040,580        817,523      4,886,124                -          441,724
 Springfield              1,913,959              -      1,494,985                -          351,528

Indiana:
 Carmel                   3,577,476        684,321      3,730,497                -           84,689
 Elkhart                  3,130,000        637,753      5,834,950                -          443,177
 Evansville               2,841,543        359,102      2,880,265                -          289,148
 Fort Wayne               2,766,710        473,564      3,062,301                -          523,377
 Indy Castleton           2,943,827        584,039      5,241,877                -          271,201
 Indy East                2,590,803        400,007      2,479,422                -          286,961
 Indy Northwest           2,030,234        442,666      2,217,552                -        1,309,924
 Indy South                 244,747        180,071      1,824,161                -          174,021
 Indy West                4,630,463        916,161      5,236,594                -          172,453
 Kokomo                   2,841,543        527,376      3,720,270           (5,843)         604,345
 Lafayette                3,146,939        403,849      3,970,336                -          646,480
 Muncie                   2,273,235        407,065      3,392,767                -          428,381
 South Bend               3,409,852        585,531      5,836,122                -          620,827

Iowa:
 Bettendorf               2,923,504        974,058      3,073,596                -          252,957

Kentucky:
 Florence                 2,385,000        524,289      2,293,556                -          195,550
 Louisville East          4,941,119        585,491      6,973,653                -          472,159
 Louisville South         2,415,000        644,870      6,509,901                -        1,202,509
 Richmond                 2,227,447        607,095              -            2,858        3,980,000

Louisiana:
 Lafayette                2,884,128        433,291              -          204,546        4,682,670
 Shreveport               2,370,409        531,041              -            8,409        3,979,297

Mississippi:
 Grenada                  1,076,621        350,000              -            2,217        1,584,712
 Jackson                  2,268,784        586,831              -              602        3,764,674
 Meridian                 1,697,934        419,856              -            2,648        2,403,451
 Pearl                    2,355,245        564,932              -                -        3,757,941
 Tupelo                   1,465,809        427,924              -            1,360        2,305,554
 Vicksburg                1,690,760        326,653              -            1,112        2,407,825

North Carolina:
 Dunn                     1,113,108        202,052              -                -        1,520,899
 Eden                     1,039,684        197,468              -               26        1,553,622
 Forest City              1,611,863        187,294              -            2,950        2,010,328
 Goldsboro                2,121,850        397,096              -           (5,102)       3,750,723
 Greenville               1,090,710        310,006              -                -        1,520,212
 Henderson                2,170,535        478,688              -                -        3,758,866
 Hickory                  1,684,498        412,322              -                -        2,387,762
 Laurinburg               1,020,255        225,441              -         (181,525)       1,305,628
 Lenoir                   1,000,111        360,923              -            1,605        1,440,277
 Roanoke Rapids           1,062,172        320,014              -           (4,812)       1,512,814
 Sanford                  1,020,255        227,030              -           32,171        1,486,621
 Smithfield               1,021,348        246,092              -                -        1,575,043
 Wilson                     913,159        237,712              -               20        1,570,371
 Wilmington               2,284,898        685,078              -              (87)       3,987,493

Ohio:
 Cincy North              2,196,794        521,588      2,220,586                -          303,372
 Columbus                 3,742,383        782,254      3,905,175                -          697,045
 Dayton                   2,030,226        625,511      3,388,780                -          504,254

</TABLE>


<TABLE>
<CAPTION>

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

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

Illinois:
 Normal                       1,076,916      5,488,731       6,565,647         700,035       1999           -         (e)
 Peoria                         817,523      5,327,849       6,145,371         716,334       1999           -         (e)
 Springfield                          -      1,846,513       1,846,513         415,257       1999           -         (e)

Indiana:
 Carmel                         684,321      3,815,186       4,499,507         323,877       1999           -         (e)
 Elkhart                        637,753      6,278,127       6,915,879         721,911       1999           -         (e)
 Evansville                     359,102      3,169,413       3,528,515         495,468       1999           -         (e)
 Fort Wayne                     473,564      3,585,679       4,059,243         456,780       1999           -         (e)
 Indy Castleton                 584,039      5,513,077       6,097,116         641,023       1999           -         (e)
 Indy East                      400,007      2,766,383       3,166,390         443,481       1999           -         (e)
 Indy Northwest                 442,666      3,527,476       3,970,142       1,045,965       1999           -         (e)
 Indy South                     180,071      1,998,182       2,178,253         364,685       1999           -         (e)
 Indy West                      916,161      5,409,047       6,325,208         606,851       1999           -         (e)
 Kokomo                         521,533      4,324,615       4,846,149         510,695       1999           -         (e)
 Lafayette                      403,849      4,616,816       5,020,665         601,922       1999           -         (e)
 Muncie                         407,065      3,821,147       4,228,213         463,705       1999           -         (e)
 South Bend                     585,531      6,456,949       7,042,481         668,908       1999           -         (e)

Iowa:
 Bettendorf                     974,058      3,326,552       4,300,611         534,602       1999           -         (e)

Kentucky:
 Florence                       524,289      2,489,106       3,013,395         448,488       1999           -         (e)
 Louisville East                585,491      7,445,812       8,031,303         756,623       1999           -         (e)
 Louisville South               644,870      7,712,410       8,357,280         851,394       1999           -         (e)
 Richmond                       609,953      3,980,000       4,589,953          97,957       1999        2001         (e)

Louisiana:
 Lafayette                      637,837      4,682,670       5,320,506         201,672       1999        2001         (e)
 Shreveport                     539,450      3,979,297       4,518,747         146,910       1999        2001         (e)

Mississippi:
 Grenada                        352,217      1,584,712       1,936,929         182,630       1998        1999         (e)
 Jackson                        587,433      3,764,674       4,352,107         349,551       1998        2000         (e)
 Meridian                       422,504      2,403,451       2,825,955         296,813       1998        1999         (e)
 Pearl                          564,932      3,757,941       4,322,873         462,522       1998        2000         (e)
 Tupelo                         429,284      2,305,554       2,734,837         397,554       1998        1998         (e)
 Vicksburg                      327,765      2,407,825       2,735,590         352,845       1998        1999         (e)

North Carolina:
 Dunn                           202,052      1,520,899       1,722,951         311,555       1997        1998         (e)
 Eden                           197,494      1,553,622       1,751,116         290,127       1997        1998         (e)
 Forest City                    190,244      2,010,328       2,200,572         488,275       1996        1997         (e)
 Goldsboro                      391,994      3,750,723       4,142,717         324,883       1999        2000         (e)
 Greenville                     310,006      1,520,212       1,830,218         287,956       1998        1998         (e)
 Henderson                      478,688      3,758,866       4,237,555         278,030       1999        2000         (e)
 Hickory                        412,322      2,387,762       2,800,084         328,215       1998        1998         (e)
 Laurinburg                      43,916      1,305,628       1,349,544         325,563       1996        1997         (e)
 Lenoir                         362,528      1,440,277       1,802,805         285,112       1997        1998         (e)
 Roanoke Rapids                 315,202      1,512,814       1,828,016         290,397       1997        1998         (e)
 Sanford                        259,201      1,486,621       1,745,822         343,916       1996        1997         (e)
 Smithfield                     246,092      1,575,043       1,821,135         346,302       1997        1998         (e)
 Wilson                         237,732      1,570,371       1,808,103         338,374       1996        1997         (e)
 Wilmington                     684,991      3,987,493       4,672,485         196,722       1999        2001         (e)

Ohio:
 Cincy North                    521,588      2,523,957       3,045,545         481,096       1999           -         (e)
 Columbus                       782,254      4,602,220       5,384,474         594,154       1999           -         (e)
 Dayton                         625,511      3,893,034       4,518,545         598,375       1999           -         (e)

</TABLE>
                                      F-25

<PAGE>
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 2001
<TABLE>
<CAPTION>

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

South Carolina:
  Anderson                1,176,482        201,000              -          133,385        2,236,515
  Cheraw                  1,639,863        168,458              -          (50,000)       1,957,044
  Duncan                  1,008,451        212,246              -                -        1,500,715
  Easley                  1,007,773        266,753              -            2,710        1,197,501
  Gaffney                 1,877,271        135,025              -                -        1,710,205
  Georgetown              1,056,556        144,353              -                -        1,506,263
  Greenwood               1,875,972        140,231              -           20,741        1,858,682
  Lancaster               2,018,259        150,592              -                -        2,238,690
  Orangeburg              2,072,924        165,010              -              585        2,080,942
  Seneca                  2,046,542        204,385              -                -        2,260,893

Tennessee:
  Alcoa                   2,136,714        427,803              -                -        4,000,629
  Cleveland               1,715,636        384,688              -            4,343        2,273,320
  Columbia                1,946,361        483,568              -            7,389        3,090,209
  Decherd                 1,222,584        254,501              -         (124,809)       1,364,611
  Gallatin                1,604,508        405,738              -                -        2,301,989
  Greeneville             1,680,573        406,052              -         (274,709)       3,100,555
  Jackson                 2,161,628        467,741              -              141        3,766,464
  Johnson City            1,788,128        405,939              -               89        2,215,127
  Kingsport               1,829,458        425,481              -                -        3,087,966
  Knoxville               1,988,660        572,026      3,347,959                -          219,456
  Oakridge                2,772,514        451,037              -                -        4,422,469
  Tullahoma               1,222,584        303,536              -                -        1,345,709

Virginia:
  Harrisonburg            2,206,415        435,000              -             (700)       3,766,986
  Martinsville            1,838,161        411,496              -            3,100        3,112,288

Construction in
 progress:
  Easley, SC                      -              -              -                -          545,216
  Oxford, AL                      -              -              -                -          480,310
  Tuscaloosa, AL                  -              -              -                -          182,832
  Georgetown, SC                  -              -              -                -          669,366
  West Monroe, LA            58,848        495,209              -                -          883,338

Billboards                  445,932              -      2,381,012                -          492,790
                       ------------    -----------   ------------         --------     ------------
Operating property
 and equipment          220,361,644     42,941,953     95,066,185           55,750      233,870,818

Property and equipment
 held for sale            6,701,008      2,865,880     10,380,955          (12,990)        (968,212)
                       ------------    -----------   ------------         --------     ------------
  Totals               $227,062,652    $45,807,833   $105,447,140         $ 42,760     $232,902,606
                       ============    ===========   ============         ========     ============

</TABLE>


<TABLE>
<CAPTION>

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

South Carolina:
  Anderson                      334,385      2,236,515       2,570,900         661,085       1993        1993         (e)
  Cheraw                        118,458      1,957,044       2,075,503         417,751       1995        1995         (e)
  Duncan                        212,246      1,500,715       1,712,961         336,264       1997        1998         (e)
  Easley                        269,463      1,197,501       1,466,964         342,327       1994        1995         (e)
  Gaffney                       135,025      1,710,205       1,845,230         461,242       1995        1995         (e)
  Georgetown                    144,353      1,506,263       1,650,616         373,133       1996        1996         (e)
  Greenwood                     160,972      1,858,682       2,019,654         485,819       1994        1995         (e)
  Lancaster                     150,592      2,238,690       2,389,282         365,517       1994        1995         (e)
  Orangeburg                    165,595      2,080,942       2,246,537         374,746       1995        1995         (e)
  Seneca                        204,385      2,260,893       2,465,278         332,357       1996        1996         (e)

Tennessee:
  Alcoa                         427,803      4,000,629       4,428,432         147,006       1999        2001         (e)
  Cleveland                     389,031      2,273,320       2,662,351         329,705       1997        1998         (e)
  Columbia                      490,957      3,090,209       3,581,166         248,037       1998        2000         (e)
  Decherd                       129,692      1,364,611       1,494,302         326,038       1996        1997         (e)
  Gallatin                      405,738      2,301,989       2,707,727         285,193       1998        1999         (e)
  Greeneville                   131,343      3,100,555       3,231,898         417,039       1998        2000         (e)
  Jackson                       467,882      3,766,464       4,234,346         417,443       1998        2000         (e)
  Johnson City                  406,028      2,215,127       2,621,155         479,532       1997        1997         (e)
  Kingsport                     425,481      3,087,966       3,513,447         266,693       1999        2000         (e)
  Knoxville                     572,026      3,567,416       4,139,441         534,993       1999           -         (e)
  Oakridge                      451,037      4,422,469       4,873,506         539,291       1998        1999         (e)
  Tullahoma                     303,536      1,345,709       1,649,245         310,184       1996        1997         (e)

Virginia:
  Harrisonburg                  434,300      3,766,986       4,201,286         278,182       1998        2000         (e)
  Martinsville                  414,596      3,112,288       3,526,884         249,643       1998        2000         (e)

Construction in
 progress:
  Easley, SC                          -        545,216         545,216                          -           -          -
  Oxford, AL                          -        480,310         480,310                          -           -          -
  Tuscaloosa, AL                      -        182,832         182,832                          -           -          -
  Georgetown, SC                      -        669,366         669,366                          -           -          -
  West Monroe, LA               495,209        883,338       1,378,547                          -           -          -

Billboards                            -      2,873,802       2,873,802         724,141       1999        2000         (e)
                            -----------   ------------    ------------     -----------
Operating property
 and equipment               42,997,702    328,937,002     328,937,002      51,874,113

Property and equipment
 held for sale                2,852,890      9,412,743       9,412,743       2,451,741          -           -         (e)
                            -----------   ------------    ------------     -----------
  Totals                    $45,850,592   $338,349,745    $338,349,745     $54,325,854
                            ===========   ============    ============     ===========

</TABLE>
                                      F-26

<PAGE>

                               Jameson Inns, Inc.
                              Notes to Schedule III


<TABLE>
<CAPTION>

                                                          2001                 2000                1999
                                                      ------------          ------------       ------------
<S>                                                   <C>                   <C>                <C>

(a)  Reconciliation of real estate
     -----------------------------
     Balance at beginning of year ................    $373,074,509          $321,134,052       $168,880,042
     Additions during year:
               Improvements ......................      30,482,886            53,873,140        157,106,500
               Deletions .........................     (19,357,057)           (1,932,683)        (4,852,490)
                                                      ------------          ------------       ------------
     Balance at end of year ......................    $384,200,338          $373,074,509       $321,134,052
                                                      ============          ============       ============

(b)  Reconciliation of accumulated
      -----------------------------
     depreciation
     ------------
     Balance at beginning of year ................    $ 38,983,651          $ 24,551,080       $ 16,754,843
               Depreciation for the year .........      19,517,341            14,619,522         10,396,468
               Retirements .......................      (4,175,138)             (186,951)        (2,600,231)
                                                      ------------          ------------       ------------
     Balance at end of year ......................    $ 54,325,854          $ 38,983,651       $ 24,551,080
                                                      ============          ============       ============

</TABLE>


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

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

     Buildings                              31.5     years

     Land Improvements                      15       years

     Furniture, fixtures and equipment       5       years

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

     Buildings                              39       years

     Land Improvements                      15       years

     Furniture, fixtures and equipment      3-5      years

     Billboards                             10       years















                                       F-27

<PAGE>



                         Report of Independent Auditors

The Members
Kitchin Hospitality, LLC
  (formerly Jameson Hospitality, LLC)

We have audited the accompanying consolidated balance sheets of Kitchin
Hospitality, LLC (formerly Jameson Hospitality, LLC) as of December 31, 2001 and
2000, and the related consolidated statements of income, members' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kitchin
Hospitality, LLC at December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.

                                                          ERNST & YOUNG LLP

Atlanta, Georgia
March 1, 2002


                                      F-28

<PAGE>

                            Kitchin Hospitality, LLC
                       (formerly Jameson Hospitality, LLC)
                           Consolidated Balance Sheets
<TABLE>
<CAPTION>


                                                                               December 31
                                                                         2001                   2000
                                                               ---------------------------------------------
<S>                                                                    <C>                  <C>
Assets
Current assets:
    Cash                                                               $   597,423          $  1,733,272
    Marketable securities                                                1,136,457             1,113,795
    Hotel accounts receivable, net of allowance of $57,592
      and $85,324                                                        1,502,868             1,827,041
    Construction contract and other receivables                          1,831,378             1,094,730
    Receivable from affiliates                                                   -             2,190,613
    Predevelopment costs                                                   212,353               103,773
    Prepaid expenses and other assets                                      571,434               261,413
    Inventory                                                            1,452,113             1,451,363
                                                               ---------------------------------------------
                                                                         7,304,026             9,776,000

Property and equipment, net                                                602,632               711,339
Intangibles, net                                                           241,989               253,493
Deferred finance costs, net                                                  8,475                     -
                                                               ---------------------------------------------
                                                                        $8,157,122           $10,740,832
                                                               =============================================

Liabilities and Members' capital
Current liabilities:
    Subcontractors payable, including retainage of $396,128
      and $1,256,722                                                    $2,107,440          $  4,054,135
    Accounts payable                                                       443,397               593,350
    Payable to affiliates                                                    4,383                     -
    Notes payable, current portion                                          13,512                 9,916
    Sales and use taxes payable                                            730,527               716,485
    Accrued payroll                                                      1,634,492             1,176,161
    Other accrued liabilities                                            2,273,745             2,993,320
                                                               ---------------------------------------------
                                                                         7,207,496             9,543,367

Deferred gain on sale of asset                                             457,610               670,502
Notes payable, long-term portion                                           305,047               306,393
                                                               ---------------------------------------------
Total liabilities                                                        7,970,153            10,520,262
Members' capital                                                           186,969               220,570
                                                               ---------------------------------------------
                                                                        $8,157,122           $10,740,832
                                                               =============================================
</TABLE>


See accompanying notes.


                                      F-29


<PAGE>

                            Kitchin Hospitality, LLC
                       (formerly Jameson Hospitality, LLC)
                        Consolidated Statements of Income
<TABLE>
<CAPTION>

                                                                  Year ended December 31
                                                      2001                 2000                 1999
                                             -----------------------------------------------------------------
<S>                                             <C>                  <C>                    <C>

Revenues:
   Room rental revenues                           $   93,843,673       $    93,351,545       $  74,245,709
   Telephone revenues                                  1,216,189             1,572,681           1,450,448
   Other inn-related sales                             1,146,822             1,171,575             730,866
                                             -----------------------------------------------------------------
   Hotel revenues                                     96,206,684            96,095,801          76,427,023

   Construction revenues                              34,247,314            48,298,347          30,413,710
   Billboard rentals                                           -                     -             105,877
   Overhead reimbursement income                       1,102,606             1,115,873                   -
   Management and license fee income                       8,195                     -              36,772
   Gain on sale of assets, net                           211,986               134,471             240,545
                                             -----------------------------------------------------------------
                                                     131,776,785           145,644,492         107,223,927

Expenses:
   Lease expense                                      43,454,156            43,099,792          34,612,795
   Cost of construction revenues                      27,599,441            41,599,541          25,342,725
   Room expenses                                      24,968,501            24,265,382          19,132,033
   Utilities                                           3,765,037             5,520,621           4,029,937
   General and administrative                         23,164,717            23,413,500          17,534,532
   Maintenance                                         4,262,980             4,063,860           3,303,181
   Advertising                                         3,108,706             3,005,726           2,706,089
   Prospective site expense                                    -                     -             301,401
   Interest (income) expense, net                       (285,201)             (233,762)             17,922
   Depreciation and amortization                         288,583               316,806             109,316
                                             -----------------------------------------------------------------
Total expenses                                       130,326,920           145,051,466         107,089,931
                                             -----------------------------------------------------------------
Net income                                        $    1,449,865       $       593,026       $     133,996
                                             =================================================================
</TABLE>

See accompanying notes.

                                      F-30

<PAGE>

                            Kitchin Hospitality, LLC
                       (formerly Jameson Hospitality, LLC)
              Consolidated Statements of Members' Capital (Deficit)
<TABLE>
<CAPTION>


                                                              Members' Capital      Comprehensive Income
                                                                  (Deficit)                 (Loss)
                                                              ----------------      --------------------
<S>                                                             <C>               <C>

Balance at December 31, 1998                                    $     69,327
   Capital contributions                                             105,764
   Distributions                                                     (42,723)
   Net income                                                        133,996           $     133,996
   Unrealized loss on marketable securities                         (421,595)               (421,595)
                                                                                       --------------
   Comprehensive loss                                                      -           $    (287,599)
                                                               --------------         ===============
Balance at December 31, 1999                                        (155,231)
   Distributions                                                    (392,505)
   Net income                                                        593,026           $     593,026
   Unrealized gain on marketable securities                          175,280                 175,280
                                                                                      ---------------
   Comprehensive income                                                    -           $     768,306
                                                               ---------------        ===============

Balance at December 31, 2000                                         220,570
   Distributions                                                  (1,506,046)
   Net income                                                      1,449,865             $   540,150
   Unrealized gain on marketable securities                           22,580                  22,580
                                                                                      ---------------
   Comprehensive income                                                    -              $1,331,036
                                                               --------------         ===============
Balance at December 31, 2001                                       $ 186,969
                                                               ===============

</TABLE>


See accompanying notes.

                                      F-31


<PAGE>

                            Kitchin Hospitality, LLC
                       (formerly Jameson Hospitality, LLC)
                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>


                                                                                          Year ended December 31
                                                                                  2001              2000             1999
                                                                           ------------------------------------------------------
<S>                                                                           <C>               <C>             <C>

Operating activities
Net income                                                                    $    1,449,865    $      593,026   $     133,996
Adjustments to reconcile net income to cash (used in) provided by
   operating activities:
      Depreciation and amortization                                                  288,583           316,806         109,316
      Bad debt expense                                                                     -                 -         264,684
      Gain on sale of assets                                                        (211,986)         (134,471)       (240,545)
      Changes in assets and liabilities increasing (decreasing) cash:
          Accounts receivable                                                        324,173          (326,529)       (853,194)
          Other receivables                                                         (736,648)           35,063          77,361
          Receivable from (payable to) affiliates                                  1,285,281          (741,311)     (5,220,190)
          Lease expense payable                                                            -        (1,159,197)      4,651,562
          Predevelopment costs                                                      (108,580)          185,012         168,428
          Prepaid expenses and other assets                                         (310,021)          102,255           3,347
          Inventory                                                                     (750)         (195,348)       (108,876)
          Subcontractors payable                                                  (1,946,695)        1,013,636         (65,667)
          Accounts payable                                                          (149,953)         (699,889)       (471,869)
          Accrued payroll and other                                                 (247,202)        2,695,339         787,556
                                                                           ------------------------------------------------------
Net cash provided by (used in) operating activities                                 (363,933)        1,684,392        (764,091)
Investing activities
Proceeds from sale of assets                                                               -                 -         592,707
Purchase of property and equipment                                                  (177,835)          (93,558)       (103,819)
Purchase of Signature Inn assets, net of cash acquired                                     -                 -          17,500
                                                                           ------------------------------------------------------
Net cash (used in) provided by investing activities                                 (177,835)          (93,558)        506,388
Financing activities
Contributions from members                                                                 -                 -         150,095
Distributions to members                                                            (596,331)         (392,505)       (243,479)
Proceeds from notes payable                                                           11,300                 -               -
Payments on notes payable                                                             (9,050)           (8,339)       (183,210)
                                                                           ------------------------------------------------------
Net cash used in financing activities                                               (594,081)         (400,844)       (276,594)

Net change in cash                                                                (1,135,849)        1,189,990        (534,297)
Cash at beginning of year                                                          1,733,272           543,282       1,077,579
                                                                           ------------------------------------------------------
Cash at end of year                                                           $      597,423     $   1,733,272    $    543,282
                                                                           ======================================================
Supplemental cash flow information
Interest paid, net of interest capitalized                                    $       32,238     $      31,700    $     31,919
                                                                           ======================================================
Non-cash activity
Unrealized gain (loss) on marketable securities                               $       22,580     $     175,280    $   (421,595)
                                                                           ======================================================
Non-cash distribution to reduce affiliate receivable                          $     (909,715)    $           -    $          -
                                                                           ======================================================
Net non-cash items related to merger and distribution activities              $              -   $           -    $    156,425
                                                                           ======================================================
</TABLE>

See accompanying notes.

                                      F-32

<PAGE>

                            Kitchin Hospitality, LLC
                       (formerly Jameson Hospitality, LLC)
                   Notes to Consolidated Financial Statements

                                December 31, 2001

1. Business and Basis of Financial Statements

Kitchin Hospitality, LLC (the "Company"), formerly Jameson Hospitality, LLC,
leases, operates, and develops primarily inns owned by Jameson Inns, Inc. (the
"REIT"). Jameson Inns, Inc. is a real estate investment trust which owns the
Jameson Inns, and effective May 7, 1999, Signature Inns properties (the "Inns").
Thomas W. Kitchin is the Chairman and CEO of Jameson Inns, Inc. and of the
Company.

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

  o       The Hotel division leases the Inns from the REIT (see Note 3) and
          operates the Inns in all respects including staffing, advertising,
          housekeeping, and routine maintenance. At the present time, the
          Company is the exclusive lessee of Jameson Inns and Signature Inns. At
          December 31, 2001, the Company leased 124 Inns (8,355 rooms).

  o       The Construction division develops Inns and Inn expansions for the
          REIT, including identification of suitable Inn locations, Inn design
          and configuration, land preparation, construction, acquisition of
          initial furniture, fixtures and equipment, and pre-marketing of
          properties prior to opening. The Construction division also acts as
          the general contractor for various unrelated commercial developers.

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

2. Summary of Significant Accounting Policies

Use of Estimates

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

Reclassifications

Certain amounts in the 2000 and 1999 financial statements have been reclassified
to conform to the 2001 presentation.

Marketable Securities

The Company considers all of its marketable securities as available for sale and
hence records them at fair value with changes in unrealized gains or losses
being recorded directly to members' capital (deficit). Fair value is based on
the closing price of the securities on the last day of trading in the year.

Revenue Recognition

For inns the Company operates, hotel revenues, services and other fees are
recognized when earned.

                                      F-33

<PAGE>

Contracts

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

Predevelopment Costs

The Company capitalizes direct costs related to specific future Inn sites when
they are deemed probable and until either the REIT purchases the land and actual
construction begins when the amounts are transferred to construction costs, or
until the site is no longer deemed probable at which time the costs are
expensed. Amounts expensed are reflected as "Prospective Site Expense" in the
accompanying statements of operations.

Inventory

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

Property and Equipment

Property and equipment is stated at cost.

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

The Company recognizes impairment losses 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 were no impairment losses recorded for the periods presented.

Intangibles

Intangibles consist primarily of the registered trademark, "The Jameson Inn(R)"
and goodwill associated with the Signature Inn transaction in May 1999. The
lease described in Note 3 requires the Company to operate the Inns using the
trademarks and not to use the trademarks (or license its use to any other
parties) for the operation of lodging facilities other than the Inns unless the
REIT does not object to such unrelated use. The REIT has an option to purchase
The Jameson Inn(R) and Signature Inns(R) trademarks from the Company at the end
of the lease term (or upon the earlier termination of the lease with respect to
all of the Inns) for $25,000 and $50,000, respectively. The intangibles are
being amortized over 20 years. Accumulated amortization totaled $38,572 and
$25,772 as of December 31, 2001 and 2000, respectively. The Company does not
expect the adoption of SFAS No. 142 Goodwill and other Intangible Assets to have
a material effect on the consolidated financial statements.

                                      F-34

<PAGE>

Income Taxes

Kitchin Hospitality, 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 the Company's taxable income or loss in their respective
tax returns; therefore, no provision for income taxes has been included in the
accompanying financial statements.

Advertising

The Company expenses advertising as incurred.

Recent Accounting Pronouncements

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

In June 2001, the Financial Accounting Standards Board issued SFAS No. 142
Goodwill and Other Intangible Assets ("SFAS No. 142"). Under SFAS No. 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually for impairment. The Company adopted the standard on January 1,
2002. No asset impairment write-down will occur as a result of adoption.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144").
SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 requires that
long-lived assets to be disposed of by sale, including those of discontinued
operations, be measured at the lower of carrying amount or fair value less cost
to sell, whether reported in continuing operations or in discontinued
operations. Discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet been incurred.
SFAS No. 144 also broadens the reporting of discontinued operations to include
all components of an entity with operations that can be distinguished from the
rest of the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. The Company adopted the standard on
January 1, 2002 and is evaluating what impact, if any, SFAS No. 144 will have on
its consolidated financial statements.

3. Leases

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

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

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 Company over the relevant period. For Jameson Inns, the
percentage is 39% of such revenues up to $22.65 per day per room in 2001 plus
65% of all additional average daily room rental revenues. For Signature Inns,
the percentage is 37% of such revenues up to $38.00 per day per room in 2001
plus 65% of the next $10.00 of average daily per room rental revenues; plus 70%
of all additional average daily room rental revenues.

                                      F-35

<PAGE>

Total rent for the Jameson Inns for any calendar year may not exceed 47% of
total room rental revenues Jameson Inns for that year. The $22.65 and $38.00 per
room amount, for Jameson Inns and Signature Inns, respectively, used in
calculating percentage rent is subject to adjustment each year based on changes
in the Consumer Price Index and as of January 1, 2002 was adjusted to $23.01 and
$38.61 for Jameson Inns and Signature Inns, respectively.

Base rent totaled $31,279,152, $28,900,248 and $20,998,053 in 2001, 2000 and
1999, respectively, and assuming the same number of rooms in operation at
December 31, 2001, would total $31,215,528 per year until the Lease expires.

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

4. Property and Equipment

Property and equipment consists of the following at December 31:

                                          2001              2000
                                   -----------------------------------

Furniture, fixtures and equipment     $ 1,475,419        $1,332,441
Leasehold improvements                    357,455           359,129
                                   -----------------------------------
                                        1,832,874         1,691,570
Accumulated depreciation               (1,230,242)         (980,231)
                                   -----------------------------------
                                      $   602,632        $  711,339
                                   ===================================

On April 2, 1999, the Company completed the sale of the outdoor advertising
assets and certain operations of the Company to the REIT. These assets consist
of approximately 100 roadside billboards on which advertising for the Jameson
hotel properties and, in certain instances, other services or products for third
parties, is placed. Consideration of $2,381,000 paid to the Company consisted of
(i) 72,727 newly issued shares of the REIT's Series A Preferred Stock (at
$17.625 per share), (ii) $400,000 in cash, and (iii) the assumption of
indebtedness of approximately $700,000 which is secured by mortgages on the
billboards and the revenues generated therefrom. The gain of $1,163,098 is being
recognized over the lease period and $212,892 was recognized in each of the
years ended December 31, 2001 and 2000, respectively.

5. Contracts

Contracts consist of the following at December 31:
<TABLE>
<CAPTION>


                                                             2001                  2000
                                                        --------------------------------------
<S>                                                        <C>                   <C>

Costs incurred on contracts                                 $17,436,706           $41,599,541
Estimated earnings                                            3,994,038             6,698,806
                                                        --------------------------------------
Contract revenues earned                                     21,430,744            48,298,347
Less: billings                                               21,433,949            48,298,347
                                                        --------------------------------------
Costs and estimated earnings in excess of billings on
   contracts in progress                                    $     3,205           $         -
                                                        ======================================
</TABLE>

                                      F-36

<PAGE>

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

6. Notes Payable

Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>


                                                                                      2001         2000
                                                                                ---------------------------
<S>                                                                                <C>          <C>

$1.5 million line of credit, maturing on October 15, 2002, interest only
     installments due monthly until maturity. Interest accrues at the rate of
     prime plus 3/4 (5.5% at December 31, 2001). This loan is guaranteed by the
     CEO of the Company.

                                                                                    $ 11,300    $       -
Mortgage note payable, maturing October 2017, due in monthly installments of
     $2,873 of principal and interest with remaining unpaid balance payable at
     maturity. Interest accrues at prime plus 1.25% (6.0% at December 2001).
     This loan is guaranteed by the CEO of the Company.                              280,253       287,033


Notes payable, maturing, July 2009. Due in monthly installments of $425 of
     principal and interest with remaining unpaid balance payable at maturity.
     Interest accrues at a 10% per annum.

                                                                                      27,006        29,276
                                                                                 --------------------------
Total                                                                                318,559       316,309
Less current portion                                                                  13,512         9,916
                                                                                 --------------------------
                                                                                    $305,047     $ 306,393
                                                                                 ==========================
</TABLE>


At December 31, 2001 and 2000, none of the Company's net book value of property
and equipment was collateralized by the various notes payable.

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

            2002                            $     13,512
            2003                                  12,009
            2004                                  13,215
            2005                                  14,765
            2006                                  16,007
            Thereafter                           249,051
                                            ------------
                                            $    318,559
                                            ============

                                      F-37


<PAGE>

7. Related Party Transactions

At December 31, 2001 the Company had executed or expected to execute
construction contracts with the REIT for new Inns or expansions totaling $7.4
million, of which $4.6 million had not been expended.

The Company shares office space and management with the REIT. The Company has a
Cost Reimbursement Agreement with the REIT whereby the REIT agrees to pay for
its share of the use of office space, office equipment, telephones, file and
storage space and other reasonable and necessary office equipment and facilities
and personnel costs. Overhead charged to the REIT was approximately $875,000,
$962,000 and $417,000 for 2001, 2000 and 1999, respectively pursuant to the Cost
Reimbursement Agreement and is reflected as overhead reimbursement income in the
accompanying statements of income.

The Company's construction contracts with the REIT are generally fixed price and
limit the Company's profit on each contract to 10% after considering costs of
construction and certain other amounts. The Company does not believe that there
were amounts in excess of such limitations at December 31, 2001, 2000 and 1999.

Although the REIT is the legal borrower of construction loans or related debt,
the Company is responsible for interest due on such financing during the
construction period as a part of its contract. Construction period interest
incurred during 2001, 2000 and 1999, which is included in cost of revenues
earned, totaled approximately $510,252, $1,686,879 and $1,596,925, respectively.
Interest paid includes amounts paid on behalf of the REIT.

On June 5, 2001, the Company entered into a Capital Refurbishment Agreement with
Jameson Inns, Inc. authorizing the Company to complete all refurbishment
projects for Jameson Inns, Inc. The agreement requires Jameson Inns, Inc. to pay
the Company cost, plus a 7% profit margin for the refurbishment projects. For
the period June 5, 2001 (inception) to December 31, 2001, total amounts billed
by the Company to Jameson Inns, Inc. in accordance with the Capital
Refurbishment Agreement total $6,987,813 and are included as a component of
construction revenues.

8. Commitments and Contingencies

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


                  Year ending December 31,     $  628,009
                  2002                            628,009
                  2003                            628,009
                  2004                            628,009
                  2005                            628,009
                  2006                          2,960,311
                  Thereafter                   ----------
                                               $6,100,356
                                               ==========

                                      F-38


<PAGE>

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


        Year ending December 31,
        2002                                     $782,068
        2003                                       42,348
                                                 --------
                                                 $824,416
                                                 ========

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

                                      F-39