<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, 2000 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. [X]

     Aggregate market value of the voting and non-voting common equity stock
held by nonaffiliates of the registrant as of March 22, 2001: $74,137,340.

     Number of shares of common stock outstanding on March 22, 2001: 11,568,018.
<PAGE>

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the proxy statement for the annual meeting of stockholders to
be held June 30, 2001 are incorporated by reference into Part III.
<PAGE>

                                   FORM 10-K
                              JAMESON INNS, INC.
                                 ANNUAL REPORT

                         YEAR ENDED DECEMBER 31, 2000

                               Table of Contents

                           Forward Looking Statements

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                                     PART I
Item 1.    Business....................................................................    2
Item 2.    Properties..................................................................   29
Item 3.    Legal Proceedings...........................................................   36
Item 4.    Submission of Matters to a Vote of Security Holders.........................   36

                                    PART II

Item 5.    Market for Jameson's Common Equity and Related Stockholder Matters..........   36
Item 6.    Selected Financial Data.....................................................   37
Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operation........................................................   40
Item 7A.   Quantitative and Qualitative Disclosure about Market Risks..................   46
Item 8.    Financial Statements and Supplementary Data.................................   46
Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure........................................................   47

                                    PART III

Item 10.   Directors and Executive Officers............................................   47
Item 11.   Executive Compensation......................................................   47
Item 12.   Security Ownership of Certain Beneficial
           Owners and Management.......................................................   47
Item 13.   Certain Relationships and Related Transactions..............................   47

                                    PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K............   47
</TABLE>

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

                          Forward-Looking Statements

     This report, including the documents incorporated in this report by
reference, contains certain forward-looking statements. These include statements
about our expansion plans, acquisition or leasing of additional land parcels,
construction of new hotels and expansion of existing hotels, access to debt
financing and capital, payment of quarterly dividends 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
further 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;
               and

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

     .    The ability of our lessee, 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, particularly in light of current low
          rates of unemployment.

     .    Changes in laws or regulations.

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<PAGE>

     .    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 focus on developing Inns in communities which have a strong and growing
industrial or commercial base and a shortage of quality hotel rooms. 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. 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

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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. The Inns fall within the category of
small, limited service, economy hotels.

     As a REIT, we are prohibited from operating our properties. Accordingly,
all of the Inns are leased to Jameson Hospitality, LLC under master leases. The
master leases require Jameson Hospitality to pay us base rent based on the
number of rooms in operation on the first day of each month and, where required
under the formulas in the master leases, 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.

     Jameson Hospitality is wholly owned by Thomas W. Kitchin, our chairman and
chief executive officer, and members of his family. References to Jameson
Hospitality throughout this report refer to either Jameson Hospitality 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 2000

     On February 29, 2000 we sold the Jameson Inn located in Clinton, Tennessee,
resulting in a loss of approximately $33,000. During 2000, we also sold an
undeveloped parcel of land located in Nashville, Tennessee at a profit of
approximately $300,000. We have recently signed contracts to sell two Jameson
Inns located in South Carolina, two Jameson Inns located in Georgia and one
Signature Inn located in Ohio. While we have presently made no commitments to
sell any other Jameson Inns or Signature Inns, we may consider in the future the
disposal of several of our 40-room, exterior corridor Jameson Inn hotels and
several Signature Inn hotels, all located in markets that have been under-
performing. As of December 31, 2000, two operating Signature Inns and various
outlots were classified as held for sale. We do not expect the sales of these
properties to result in a significant gain or loss.

     During 2000, we opened 17 new interior corridor Jameson Inns (1,079 total
additional rooms) and expanded 1 existing Jameson Inn (20 total additional
rooms). As of December 31, 2000, we had 5 interior corridor Jameson Inns under
development (352 total additional rooms).

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

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.

     Constraints on future growth. As of December 31, 2000, we had 5 Inns under
development. In addition, we anticipate expanding 9 of our 40 room Inns in 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 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:

                                       3
<PAGE>

     .    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;

     .    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 increase
          in the number and geographic dispersion of our Inns.

     In addition, risk factors affecting our profitability include Jameson
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.

     Potential conflicts of interest exist among us and our chief executive
officer and Jameson 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 Jameson 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 Jameson 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 Jameson Hospitality pays and allocates our overhead were
not negotiated on an arm's-length basis.

     We depend exclusively on Jameson Hospitality for lease revenues. Certain
rules relating to the qualification of REITs prohibit us from operating the
Inns. To comply with these rules, we have leased the Inns to Jameson
Hospitality. As a result, we depend exclusively on Jameson Hospitality for lease
revenues. Jameson Hospitality's obligations under the master leases are
unsecured. Jameson Hospitality has few liquid assets, a history of operating
losses and limited net worth. As a result, Jameson 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.

     Also, under the master leases, Jameson Hospitality controls the daily
operations of the Inns and we have no ability to participate in those decisions.
Thus, even if Jameson 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 Jameson 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 Jameson Hospitality's failure to
pay base rent.

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     We will need to obtain additional debt financing on favorable terms. We
intend to borrow 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 quarters 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 current level. To the
extent that we cannot, we risk the loss of some or all of our assets, including
the Inns, to foreclosure, or face difficulties meeting the REIT income
distribution requirements.

     Interest rate increases 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. Because
of the current relative unavailability and high cost of fixed interest rate
long-term financing, 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. Adverse 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 to 65% of the aggregate appraised value of the Inns.
However, our organizational documents do not limit the amount of indebtedness
that we may incur. Accordingly, our Board of Directors could change the current
policies and we could become more highly leveraged. This would increase our debt
service requirements and also the risk of our defaulting on our obligations. An
increase in our debt service requirements could adversely affect our financial
condition and results of operations,

                                       5
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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.

     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 40% 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 Jameson
Hospitality have relied and will 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 Jameson 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.  We maintain a $1.0 million key-man life insurance policy on the
life of Mr. Kitchin.  There is no assurance, however, that we will continue to
maintain such life insurance policy in effect or that any proceeds thereof would
be sufficient to compensate us for the life of Mr. Kitchin.

     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 Jameson 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 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

                                       6
<PAGE>

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 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 incident to 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);

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

     .    perceptions by travelers of the safety, convenience and
          attractiveness of the Inns;

     .    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 past
several years has 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

                                       7
<PAGE>

with the growth in the supply of rooms. As a result, occupancy rates for hotels,
including the Inns, have tended to remain constant or 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 several of the larger communities
where our Inns are located, significant numbers of 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 Jameson Hospitality's
total aggregate room revenues since July 1, 1995, less the amounts actually
expended since that date.

     We may not be adequately insured. The ownership of hotel properties by its
nature 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 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

                                       8
<PAGE>

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.

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

                                       9
<PAGE>

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 assure you 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 Jameson 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.

     Term. The Jameson Lease term expires on December 31, 2010, subject to
earlier termination upon the occurrence of certain events. The Signature Lease
expires December 31, 2012, also subject to earlier termination upon the
occurrence of certain events.

     Rent. During the terms of each of the master leases, Jameson Hospitality is
obligated to pay to us base rent calculated on the number of rooms in operation
on the first day of the month and, where required under the formula described
below, percentage rent based on room revenues. In general, percentage rent is
calculated by multiplying average daily per room rental revenues for all of the
Inns under each master lease 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,
2001, is based on the following formula:

     39% of the first $22.65 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, 2001, is based on the
following formula:

     37% of the first $38.00 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


                                       10
<PAGE>

     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
Jameson 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 Jameson
Hospitality is obligated to pay under that master lease.

     On January 1, 2002, the $22.65 amount referred to above under the Jameson
Lease and the $38.00 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, 2001. Similar adjustments will be
made on each subsequent January 1 for the year then beginning based on the
changes the Consumer Price Index experienced over the most recently completed
calendar year.

     Average daily per room rental revenues are determined by dividing room
revenues realized by Jameson 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 and exclude all credits,
rebates and refunds, sales taxes and other excise taxes. Room revenues as
defined in the Signature Lease are substantially the same as in the Jameson
Lease. On or before March 1 of each year, Jameson 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, 1998, 1999
and 2000 was $18.2 million, $22.7 million and $25.4 million, respectively. Total
rent, including both base rent and percentage rent we earned under the Signature
Lease for the period May 7, 1999 through December 31, 1999, and for the year
ended December 31, 2000, was $11.5 million and $17.1 million, respectively.

     Operating Expenses. In addition to paying base rent and, if applicable,
percentage rent, the master leases require Jameson 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 Jameson Hospitality. Our independent directors determined
that the master leases, as amended, are fair to us.

     Trademarks. Jameson Hospitality owns the registered trademarks, The Jameson
Inn(R) and Signature Inns(R). The master leases require Jameson 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 an option to
purchase The Jameson Inn(R) and Signature Inns(R) trademarks from Jameson
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.

     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. Jameson 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.

                                       11
<PAGE>

     Jameson 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. Through March 1, 2001, Jameson Hospitality had
not undertaken any significant capital or non-capital alterations, replacements
or improvements to the Inns.

     Hotels in general, including the Inns, have an ongoing need for renovation
and refurbishment. 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 Jameson Hospitality's total aggregate room
revenues since July 1, 1995, less the amounts actually expended since that date.
Capital improvements in 2001 will be contracted to Kitchin Construction Company,
a division of Jameson 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 Jameson 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 Jameson Hospitality.

     Indemnification. The master leases require Jameson 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 Jameson 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 Jameson Hospitality. The master leases do not,
however, require Jameson Hospitality to indemnify us against our gross
negligence or willful misconduct. We are required to indemnify Jameson
Hospitality against any environmental liabilities other than those caused by the
acts or negligent failures of Jameson Hospitality (for which Jameson Hospitality
will indemnify us).

     Assignment and Subleasing. Under the terms of the master leases, Jameson
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
Jameson Hospitality controlled by Mr. Kitchin, without the prior written consent
of Jameson. No assignment or subletting will release Jameson 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)  Jameson Hospitality's continuing failure to pay rent for a period
     of 10 days after receipt by Jameson Hospitality from us of written notice
     of nonpayment;

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

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

                                       12
<PAGE>

          (4)  Jameson 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 Jameson 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 Jameson 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 Jameson Hospitality.
Inventory includes: (1) cleaning supplies, (2) linens, (3) towels and (4) paper
goods.

Growth Plans for 2001

     We plan 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 Jameson 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.

     We have also begun 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 such alternatives.

     Development of New Inns. We believe that attractive opportunities 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. With operating Jameson Inns in Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia, we expect
that any future development of Jameson Inns will occur in those states as well
as in Kentucky and Louisiana. At December 31, 2000, Jameson had a total of 5
Jameson Inns under development (320 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 Jameson Hospitality in the development, construction and operation
of Jameson Inns.

     In evaluating potential development sites, we target communities with
strong industrial bases sufficient to attract business travelers. These
communities typically have significant manufacturing facilities, state and
federal government installations, or colleges and universities. 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.


                                       13
<PAGE>

     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.

     Expansion of Existing Jameson Inns. We anticipate expanding 9 Jameson Inns
in 2001. We intend to continue to expand additional existing Jameson Inns
whenever market conditions warrant. To date, we have expanded 34 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. Accordinglywe have been able to earn returns on its
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
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.

     Jameson Hospitality as Contractor. We anticipate that Jameson Hospitality
will act as general contractor for new Inns we build and for expansions of
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, however, if Jameson 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 Jameson Hospitality to staff the Inn
prior to opening. 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 Jameson Hospitality for the 17 new
Jameson Inns opened during 2000 and the one expanded Jameson Inn opened in 2000
was approximately $55,000 per 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 Jameson 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. Jameson
Hospitality practices market-sensitive pricing, increasing room rates at
particular Inns as market conditions in the specific communities warrant. The
Inns' site managers receive a significant portion of their compensation based on
achieving specified quarterly operating results.

     Marketing. Jameson Hospitality is responsible for marketing the Inns. It
focuses on local efforts directed to the business community in the city or town
where the particular Inn is located. Jameson Hospitality currently employs 16
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.
Jameson Hospitality employs billboards and other similar types of advertising
and has two "800" numbers to facilitate reservations for the Inns. Since our
acquisition of Signature, Jameson Hospitality has utilized the reservation
system previously used for the Signature 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 Jameson Hospitality has
traditionally utilized and will continue to utilize, Jameson Hospitality places
advertisements for the Inns in regional and special event publications and in

                                       14
<PAGE>

newspapers. Jameson 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 and greater name recognition.

Regulations

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

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

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

                                       15
<PAGE>

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. In 1993, we engaged a
disabilities consultant to make recommendations regarding compliance of the then
existing Jameson Inns with the ADA. The consultant submitted a report
recommending a number of improvements for access to and use by disabled persons
with respect to certain of the Jameson Inns then in operation, which
improvements were made. We have also incorporated the consultant's
recommendation into the construction of new Jameson Inns and will continue to do
so.

Employees

     At December 31, 2000, we employed 17 persons. Our employees are also
employees of Jameson Hospitality. Under a cost reimbursement agreement between
Jameson and Jameson Hospitality, we reimburse Jameson Hospitality for the time
that these shared employees spend on our business. For the year ended December
31, 2000, our reimbursement to Jameson Hospitality totaled approximately
$962,000. None of our or Jameson Hospitality's employees is represented by a
union or labor organization, nor have our or Jameson Hospitality's operations
ever been interrupted by a work stoppage. We consider relations with our
employees to be excellent.

     Jameson Hospitality.  Jameson Hospitality leases and operates all
completed Inns under the terms of the master leases.  See --The Master Leases,
above.  Jameson Hospitality has also acted as contractor for the initial
construction and expansion of all Jameson Inns.  We expect Jameson 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 Jameson Hospitality are set forth below. At December 31, 2000, Jameson
Hospitality had approximately 3,000 full- and part-time employees engaged in
day-to-day management, marketing and construction of the Inns.

     Jameson Hospitality and its predecessor companies have a history of
operating losses and a limited net worth. The audited financial statements of
Jameson Hospitality appear elsewhere in this annual report and should be
referred to for additional financial information concerning Jameson Hospitality.
Although it has not done so to date, Jameson Hospitality may engage in
activities other than as lessee and construction contractor of the Inns, subject
to restrictions under the master leases.

     Predecessors of Jameson 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 Jameson 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 Jameson 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     Director of Hotel Operations
     Joseph H. Rubin      President of Kitchin Construction Company

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

     Thomas W. Kitchin is the founder and owner with his spouse of Jameson
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 Jameson 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
Association of Publicly Traded Companies, an association that represents public
companies that trade on The Nasdaq Stock Market, New York Stock Exchange and
American Stock Exchange; a director of the Georgia Hospitality and Travel
Association; director of the American Hotel & Lodging Association; 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
Jameson 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 Jameson 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 Jameson Hospitality and its
predecessors since their inception. Also an officer of Jameson, he became chief
financial officer of Jameson in February 1994, vice president--finance in
November 1997, and president in November 1998. He joined Jameson as its
controller and treasurer on June 15, 1992, upon receiving his M.B.A. degree from
the University of Chicago with concentrations in accounting and finance. Before
attending the University of Chicago, he was a financial analyst with FMC
Corporation in Santa Clara, California, from 1989 to 1990, 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 Jameson 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 Jameson Hospitality and of Jameson
since we acquired Signature in May 1999. Prior to joining Jameson 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 director of hotel operations of Jameson Hospitality. He
joined Jameson 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
Jameson 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-

                                       17
<PAGE>

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 Jameson Hospitality, LLC, in October 1999. Prior to
joining Jameson, 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 Jameson
Hospitality, Jameson 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.

     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 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. We have recently signed contracts to sell two Jameson Inns
located in South Carolina, and two Jameson Inns located in Georgia and one
Signature Inn located in Ohio. While we have presently made no commitments to
sell any other Jameson Inns or Signature Inns, we may consider in the future the
disposal of several of our 40-room, exterior corridor Jameson Inn hotels and
several Signature Inn hotels, all located in markets that have been under-
performing. As of December 31, 2000, two operating Signature Inns and various
outlots were classified as held for sale. We do not expect the sales of these
properties to result in a significant gain or loss.

     Financing. In January 1997, we filed a shelf registration statement on Form
S-3 (the "1997 Registration Statement") with the Securities and Exchange
Commission (the "SEC") that provides for the issuance of an aggregate of up to
$100 million in our common stock, preferred stock and common stock warrants to
be offered and sold from time to time. On March 10, 1997, we completed the sale
of 2,300,000 newly issued shares of our

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<PAGE>

common stock. We used net proceeds of approximately $26 million to repay certain
existing mortgage indebtedness at that date. In February 1998, our stockholders
approved an amendment to our articles of incorporation to increase the number of
authorized shares of our common stock from 20 million to 40 million shares and
the authorized shares of preferred stock from 100,000 to 10 million shares.
Following adoption of that amendment, in 1998 we sold, under the 1997
Registration Statement, 1,200,000 shares of our Series A preferred stock at an
offering price of $25 per share. We used the approximately $28.5 million in net
proceeds from the offering of Series A preferred stock to repay indebtedness and
for general corporate purposes. In September 1999, we filed a post-effective
amendment to the 1997 Registration Statement to permit us to sell up to
1,000,000 shares of our common stock at prevailing market prices through our
designated sales agent, RCG Brinson Patrick, a division of Ramius Securities,
LLC. During 1999, we sold a total of 61,100 shares of common stock at-the-
market. These sales raised approximately $493,000 in net proceeds which we used
to repay indebtedness and for general corporate purposes. During 2000, we made
no additional sales through this shelf registration. We intend to use additional
net proceeds, if any, from any sale of securities under the 1997 Registration
Statement for the repayment of existing indebtedness, working capital and
general corporate purposes.

     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.

     We anticipate that any additional borrowings will be made directly by
Jameson. 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 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, 2000, we had outstanding an aggregate of approximately
$207.1 million of mortgage debt, including approximately $1.4 million in
construction debt. The construction debt provides for total borrowings of $12.2
million and is secured by mortgages on 5 Inns under construction.

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

     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 amounts actually
spent from that date forward. Prior to this date, the obligation to fund
replacement and refurbishment of furniture, fixtures and equipment was Jameson
Hospitality's. This policy now extends to the Signature Inns acquired in May
1999. For the period July 1, 1995, through December 31, 2000, 4% of room
revenues equaled $10.5 million and we expended $16.1 million on items in that
same period.

     Other Policies. We intend to operate in a manner that will not subject us
to regulation under the Investment Company Act of 1940. We do not intend to (1)
invest in the securities of other issuers for the purpose of

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<PAGE>

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. Most of our repurchases,
if any, will most likely be of shares of our preferred stock, but may include
our common stock as well. As of December 31, 2000, no outstanding shares have
been repurchased under the program. During the past five years, except in
connection with the acquisition of billboard assets from Jameson 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 Jameson Hospitality, there are inherent conflicts of
interest in the construction of new Jameson Inns and Signature Inns and the
expansion and refurbishment of existing Inns by Jameson Hospitality. Conflicts
of interest also exist in our dealings with Jameson 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 2001; Jameson 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 Jameson
Hospitality, or an affiliate of either, is subject to approval by a majority of
our independent directors. Further, Jameson Hospitality has agreed that neither
it nor any of its affiliates will (1) operate or manage a hotel property in
which we have not invested that is within a 20-mile radius of an Inn, or (2) own
or have any interest in any Inn in which we or affiliates do not have an
interest. In addition, Mr. Kitchin is prohibited under the terms of his
employment agreement with us from owning, managing or operating, directly or
indirectly, any hotel property other than the Jameson Inns during the term of
his employment by us or, for two years following his employment, any hotel
property within a 20-mile radius of a Jameson Inn.

     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.

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<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. In order to
understand all of the rules and regulations applicable to us as a REIT, you need
to 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) 90% 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 $8.1 million and will
discourage a disposition by us of any Inn held at the time until after 2003. 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 Jameson 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 Jameson 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. Therefore, Jameson 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).

     .    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 adjusted bases of all
          personal property at the beginning and at the end of each taxable year
          bears to the average of the REIT's aggregate adjusted bases of all
          real and personal property at the beginning and at the end of such
          taxable year.  We have confirmed by numerical testing that the
          resulting rental income attributable to personal property since
          January 1, 1994 has been less than

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<PAGE>

          15%. We monitor these tests regularly. If we project that for any Inn
          for any taxable year the resulting rental income attributable to
          personal property may exceed 15% of all rental income, a portion of
          the personal property of that Inn may be sold by us to Jameson
          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; or (iv) perform services considered to be rendered for the
occupants of the Inns other than through an independent contractor.

     Under the master leases, Jameson Hospitality has leased the land,
buildings, improvements, furnishings, and equipment comprising the Inns from us.
Jameson 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) Jameson Hospitality has the right to exclusive
possession, use and quiet enjoyment of the Inns during the term of the master
leases, (2) Jameson 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) Jameson 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) Jameson 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, Jameson
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) Jameson Hospitality has
indemnified us against all liabilities imposed on us during the term of the

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<PAGE>

master leases by reason of injury to persons or damage to property occurring at
the Inns or due to Jameson Hospitality's use, management, maintenance or repair
of the Inns, and (7) Jameson 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 not all, exceeds the fair rental value of
the Inns.

     Pursuant to IRS Revenue Ruling 55-540, if one or more of the following
conditions are present, the master leases will 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
          Jameson Hospitality,

     .    Jameson 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 Jameson 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 Jameson
Hospitality, (2) Jameson 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
Jameson 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
Jameson 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. 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."

                                       24
<PAGE>

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

Asset Tests

     At the close of each quarter of our taxable year, we must also satisfy
three tests relating to the nature of our assets. First, at least 75% of the
value of our total assets must be represented by "real estate assets" which
means (1) real property (including interests in real property and interests in
mortgages on real property), (2) shares in other REIT's (3) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company,
and (4) cash, cash items (including receivables) and government securities.
Second, not more than 25% of our total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by us may
not exceed 5% of the value of our total assets and we may not own more than 10%
of such issuer's outstanding voting securities. 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

                                       25
<PAGE>

less cash available for distribution than would be necessary to meet our annual
90% distribution requirement or to avoid federal corporate income tax with
respect to capital gain or the 4% nondeductible excise tax imposed on certain
undistributed income. To meet the 90% distribution requirement necessary to
qualify as a REIT or to avoid federal income tax with respect to capital gain or
the excise tax, it could be necessary for us to borrow funds.

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

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

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

Failure to Qualify

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

                                       26
<PAGE>

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 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."

                                       27
<PAGE>

     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 will be effective with respect to payments made after December 31,
2000, subject to certain transition rules. We urge prospective investors to
consult their own tax advisors as to the effect, if any, of the final
regulations on their purchase, ownership and disposition of shares of common
stock.

     Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by us of United States real property interests and not
designated by us as capital gains dividends will be treated as dividends of
ordinary income to the extent their source is our current or accumulated
earnings and profits. Such distributions will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from a
Non-U.S. Shareholder's investment in our stock is treated as effectively
connected with the Non-U.S. Shareholder's conduct of a United States trade or
business, the Non-U.S. Shareholder generally will be subject to a tax at
graduated rates, in the same manner as U.S. Shareholders are taxed with respect
to such distributions (and may also be subject to the 30% branch profits tax in
the case of a shareholder that is a foreign corporation). We expect to withhold
United States income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (1) a lower treaty rate
applies or (2) the Non-U.S. Shareholder files an IRS Form 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

                                       28
<PAGE>

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.


ITEM 2.   PROPERTIES.

     The Inns. The following tables set forth certain information about our 130
operating Inns at December 31, 2000.

                                        Year                  Number
                                       Opened/     Property     Of
Jameson Inns                          Expanded       Type      Rooms
------------                       --------------  --------   -------
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

                                       29
<PAGE>

                                        Year                  Number
                                       Opened/     Property     Of
                                      Expanded       Type      Rooms
                                   --------------  --------   -------
  Jasper                             1997/1998     Exterior      58
  Oxford  (2)                             1997     Exterior      40
  Ozark                                   1995     Exterior      39
  Prattville                         1998/1999     Exterior      58
  Scottsboro (2)                          1998     Exterior      40
  Selma                              1992/1995     Exterior      59
  Sylacauga (2)                           1997     Exterior      40
  Trussville                         1998/1999     Exterior      60
  Tuscaloosa (1), (2)                     1997     Exterior      40
                                                              -----
     Subtotal (18 Inns)                                         875
                                                              =====

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      60
  Brunswick                          1995/1996     Exterior      60
  Calhoun                            1988/1994     Exterior      59
  Carrollton                         1994/1995     Exterior      59
  Commerce                                1996     Exterior      40

                                       30
<PAGE>

                                      Year                  Number
                                    Opened/     Property      Of
                                    Expanded      Type      Rooms
                                    --------    --------    ------
Conyers                            1996/1999     Exterior      57
Covington                             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
Greensboro                            1990       Exterior      40
Hartwell                              1992       Exterior      40
Jesup                              1990/1991     Exterior      60
Kingsland                             1998       Exterior      40
LaGrange                           1996/1998     Exterior      56
Macon                                 1997       Exterior      40
Newnan                                2000       Interior      67
Oakwood                               1997       Exterior      40
Perry                                 1998       Exterior      40
Pooler                                2000       Interior      55
Rome                                  1999       Interior      67
Statesboro                            1989       Exterior      39
Thomaston                          1990/1996     Exterior      60
Thomasville (1)                       1998       Exterior      39
Valdosta                           1995/1995     Exterior      55
Warner Robins                         1997       Exterior      59
Washington                            1990       Exterior      41
Waycross                           1993/1996     Exterior      60
Waynesboro                            1996       Exterior      40
Winder                                1988       Exterior      39
                                                            -----
 Subtotal (34 Inns)                                         1,709
                                                            =====

                                       31
<PAGE>

                                        Year                    Number
                                       Opened/     Property       Of
                                      Expanded       Type       Rooms
                                      --------    --------      ------
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:
 Asheboro                               1997       Exterior      40
 Dunn                                   1998       Exterior      40
 Eden                                   1998       Exterior      39
 Forest City                         1997/1998     Exterior      59
 Garner                                 1998       Exterior      40
 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
                                                                ---
  Subtotal (15 Inns)                                            688
                                                                ===

                                       32
<PAGE>

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

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 (2)                          1995       Exterior      40
 Orangeburg (2)                         1995       Exterior      40
 Seneca (2)                             1996       Exterior      40
 Simpsonville                           1996       Exterior      40
 Spartanburg                            1998       Exterior      40
 Union                                  1997       Exterior      40
                                                                ---
  Subtotal (13 Inns)                                            596
                                                                ===

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
                                                                ---
  Subtotal (10 Inns)                                            569
                                                                ===

                                       33
<PAGE>

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

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

JAMESON INN TOTAL (104 Inns)                                  5,300
                                                              =====
(1)  Land is subject to a ground lease.
(2)  A 20-room expansion of this Inn is planned for 2001.


Signature Inns
--------------
                                                              Number
                                   Year          Property       Of
                                  Opened           Type        Rooms
                                  ------         --------     ------
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                             1986           Interior     101
 Evansville                         1986           Interior     125
 Terre Haute                        1987           Interior     150
 Elkhart                            1987           Interior     125
 South Bend                         1987           Interior     123
 Carmel                             1997           Interior      81
                                                              -----
  Subtotal (14 Inns)                                          1,594
                                                              =====

                                       34
<PAGE>

                                                              Number
                                    Year          Property      Of
                                   Opened           Type       Rooms
                                   ------        --------     ------

OHIO:
 Cincinnati (North)                 1985           Interior     130
 Cincinnati (Northeast)             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                             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
                                                              =====
________________

                                       35
<PAGE>

     (1) Land is subject to a ground lease.
     (2) Operates as both a Best Western and a Signature Inn.


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 2000 which required the solicitation of any
proxies.


                                    PART II

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

          As of March 22, 2001, 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
                                                ----       ---       ---------

          1999
          ----
          First Quarter                     $   9.38      $ 7.63        $ .240

          Second Quarter                       10.00        8.31          .240

          Third Quarter                         9.75        8.25          .245

          Fourth Quarter                        8.88        7.00          .245

          2000
          ----
          First Quarter                         7.75        6.50          .245

          Second Quarter                      7.8125        6.50          .245

                                       36
<PAGE>

          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. 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 service
or anticipated capital expenditures. In recent quarters, our dividend
distribution have exceeded our cash available for distribution. Unless our board
of directors determines otherwise, we currently intend to continue the dividend
distributions at the current rate. However, in order to do this we may be
required to obtain additional financing or sell some of our assets.

          During the period of February 2000 to November 2000, we issued
approximately 54,000 shares of our common stock under our 1995 Dividend
Reinvestment and Stock Purchase Plan in excess of the number of shares included
in the registration statement covering sales of our shares under that plan. This
oversale was inadvertent. Because of the relatively small number of shares
involved, the prices at which the shares were issued and the relatively short
statute of limitations covering actions for public sales of unregistered shares,
we believe our potential liability for this oversale is nominal at most. On
February 20, 2001, a registration statement was filed and became effective with
respect to shares to be issued under our recently adopted 2001 Dividend
Reinvestment and Stock Purchase Plan. Thus, the offer and sale of all shares
issued pursuant to the 2001 plan have been covered by this registration
statement.


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 and expansion of existing
Jameson Inns, the information is not comparable between periods. Historical
financial and operating information includes all Jameson Inns and Signature Inns
combined financial results. 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 Jameson
Hospitality for the entire year. Historical operating results, including net
income, may not be comparable to future operating results.


                                       37
<PAGE>

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

<TABLE>
<CAPTION>

                                                  December 31,
                                                  ------------

                                         2000         1999         1998         1997         1996
                                         ----         ----         ----         ----         ----
<S>                                  <C>          <C>          <C>          <C>          <C>

Balance Sheet Data:
Investment in real estate (before
  accumulated depreciation)          $  372,415   $  320,960   $  168,880   $  117,515   $   80,816

Net investment in real estate           334,091      296,583      152,125      104,931       70,611
Total assets                            346,725      322,852      156,329      107,606       73,985
Total mortgage debt                     207,145      173,958       53,697       29,625       22,317
Stockholders' equity                    126,741      136,303       98,869       75,161       50,763
<CAPTION>


                                                      Year Ended December 31,
                                                      ----------------------

                                           2000         1999         1998         1997         1996
                                          -----         ----         ----         ----         ----
Financial Data:
Lease revenues                       $   43,232   $   34,669   $   18,230   $   12,966   $    9,376
Expenses:
 Depreciation                            14,620       10,397        5,636        3,898        2,670
 Property and other taxes and
  insurance expense                       4,541        3,200        1,541        1,107          733
  General and administrative
  expenses                                1,405        1,117          575          445          499
  (Gain) loss on disposal of
  furniture and equipment                  (283)         755          508          144           48
  Write-off and amortization of
  offering costs                            176          100            -            -            -
  Loss on impairment of
  real estate                                 -            -        2,507            -            -
                                     ----------   ----------   ----------   ----------   ----------
Income from operations                   22,773       19,100        7,463        7,372        5,426
 Interest expense, net of
  amounts capitalized                   (14,942)      (8,429)      (1,656)        (778)      (1,386)
 Other income                                48          100            -            -            -
                                     ----------   ----------   ----------   ----------   ----------
Income before
 extraordinary item                       7,879       10,771        5,807        6,595        4,040
Extraordinary loss                           88            -          134          689          989
                                     ----------   ----------   ----------   ----------   ----------
Net income                                7,791       10,771        5,673        5,906        3,051
Preferred stock dividends                 6,696        5,387        2,188            -            -
                                     ----------   ----------   ----------   ----------   ----------
Net income attributable to
  common stockholders                     1,095        5,383        3,485        5,905        3,051
Basic earnings before
 extraordinary item                        0.11         0.51         0.37         0.72         0.65
Diluted earnings before
 extraordinary item                        0.10         0.51         0.36         0.70         0.63
Basic earnings per
 Common share                              0.10         0.51         0.36         0.64         0.49
</TABLE>

                                       38
<PAGE>

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      ----------------------

                                           2000         1999         1998         1997         1996
                                          -----         ----         ----         ----         ----
<S>                                     <C>          <C>          <C>          <C>          <C>
Diluted earnings per
 Common share                              0.10         0.51         0.35         0.63         0.48
Dividends paid per
 Common share                              0.98         0.97         0.94         0.90         0.86
Cash flow provided by
 operating activities                    37,201       23,202       13,845       11,911        6,626
Cash flow used in
 investing activities                   (51,818)     (40,228)     (55,845)     (37,362)     (23,548)
Cash flow provided by
 financing activities                    14,063       19,057       42,161       25,581       16,895

Other Data:
Funds from operations (1)            $   16,016   $   16,658   $   12,270   $   10,637   $    6,758
Ratio of earnings to fixed
 charges and preferred stock
 dividends (2)                             0.98         1.25         1.50         5.21         2.84

---------------------------------------------------------------------------------------------------
Jameson Inns:

Occupancy rate                             57.1%        60.0%        61.7%        64.9%        66.9%

ADR                                  $    54.92   $    53.05   $    50.60   $    47.25   $    45.80

REVPAR                               $    31.34   $    31.84   $    31.21   $    30.68   $    30.64

Room Revenues (3)                    $   53,989   $   48,358   $   38,787   $   27,588   $   19,950

Room nights available                 1,688,485    1,485,849    1,216,998      878,056      634,549

Operating hotels (at period end)            104           88           81           62           43

Rooms available (at period end)           5,300        4,241        3,748        2,924        2,107

<CAPTION>
                                                      Year Ended December 31,
                                                      ----------------------

                                           2000       1999 (4)     1998 (4)     1997 (4)     1996 (4)
                                           -----      --------   ----------   ----------     --------

<S>                                  <C>          <C>          <C>          <C>          <C>
Signature Inns:

Occupancy rate                             55.9%        57.9%        61.5%        64.0%        65.2%

ADR                                  $    64.81   $    63.41   $    61.48   $    58.68   $    57.56

REVPAR                               $    36.21   $    36.73   $    37.81   $    37.53   $    37.55

Room Revenues (3)                    $   42,107   $   42,817   $   43,971   $   42,960   $   39,850
</TABLE>

                                       39
<PAGE>

<TABLE>
<S>                                   <C>          <C>          <C>          <C>          <C>
Room nights available                 1,116,674    1,116,535    1,114,960    1,080,263    1,020,758

Operating hotels (at period end)             26           26           26           26           24

Rooms available (at period end)           3,051        3,059        3,059        3,059        2,859
</TABLE>

-----------

(1)  In October 1999, NAREIT issued a 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 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 2000, 1999 and 1998.

(3)  The master leases between Jameson and Jameson 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, 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 Jameson 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.


                                            Year Ended December 31
                                            ----------------------

                                         2000         1999         1998
                                         ----         ----         ----

Occupancy rate                           56.6%        60.0%        61.7%

ADR                                $    58.81   $    56.36   $    50.60

REVPAR                             $    33.28   $    33.83   $    31.21

Room rental revenues (000s)        $   93,352   $   74,246   $   37,982

                                       40
<PAGE>

                                           Year Ended December 31
                                           ----------------------

                                         2000         1999         1998
                                         ----         ----         ----
Other Inn revenues (000s)          $    2,744   $    2,181   $      804

Room Revenues (000s)               $   96,096   $   76,427   $   38,787

Room nights available               2,805,159    2,194,613    1,216,998

Operating Inns (at period end)            130          114           81

Rooms available (at period end)         8,351        7,300        3,748

          We have grown from a hotel chain with four Jameson Inns at January 1,
1990, to 104 Jameson Inns and 26 Signature Inns in operation at December 31,
2000. In addition, we have 5 Jameson Inns under development (352 rooms). 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 Jameson 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 Jameson 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 Jameson 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 9.25% 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
Jameson Hospitality which pays us annual rentals on each of the billboards.
Rental payments from these assets totaled approximately $608,000 in 2000 and
$474,000 in 1999.

          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, 2000, we owned a total of 26 Signature Inns located in six
midwestern states. All of the Signature Inns are also leased to Jameson
Hospitality.

          Although room revenues are earned by our lessee, Jameson Hospitality,
not by us, they are the basis upon which the percentage rent paid to us by
Jameson 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, 2000, we earned a combined base rent and
percentage rent in the aggregate amount of $25.4 million from rental of Jameson
Inns and $17.2 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 104 operating Jameson Inns and 26 Signature Inns, particularly
with

                                       41
<PAGE>

respect to 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 have also begun 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, 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
Jameson Hospitality's room revenues. Additionally, revenue from the rental of
billboards increased from $474,000 in 1999 to $608,000 in 2000, reflecting a
full twelve months of lease rentals. The billboards were acquired in April of
1999.

          As a result of the following factors, Jameson Hospitality's room
revenues rose 25.8%, 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:

               .    additional competition in certain markets in which our 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.

          Jameson 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.

          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
Jameson 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 state franchise taxes of $147,000.

                                       42
<PAGE>

          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.

          Comparison of the Year Ended December 31, 1999 to the Year Ended
December 31, 1998.

          Our lease revenue for 1999 increased 87.9% to $34.2 million as
compared to $18.2 million for 1998. The increase was due to an increase in
Jameson Hospitality's room revenues. Additionally, we received $474,000 in lease
rentals from the billboards we acquired in April of 1999.

          As a result of the following factors, Jameson Hospitality's room
revenues rose 97.0%, from $38.8 million for 1998 to $76.4 million in 1999:

          .    The number of room nights available at our Inns increased from
               1,216,998 in 1998 to 2,194,613 in 1999, or 80.3%, due primarily
               to our acquisition of Signature in May 1999, which accounted for
               708,764 of the additional room nights available, and to the
               opening from January 1998 through December 1999 of 27 new Jameson
               Inns (1,150 total additional rooms) and 15 expansions of existing
               Jameson Inns (290 total additional rooms).

          .    The occupancy rate for all Inns decreased from 61.7% for 1998 to
               60.0% for 1999. The decrease in overall occupancy of the Inns is
               attributable primarily to:

               .    additional competition in certain markets, and

               .    the expansion of several high occupancy Jameson Inns which
                    then experienced lower occupancy rates because of the
                    additional rooms available.

          .    ADR increased 11.4% from $50.60 in 1998 to $56.36 in 1999 due
               primarily to the addition of the Signature Inns which experienced
               an ADR of $63.31 for the period of May 7, 1999, through December
               31, 1999.

          Jameson Hospitality's Same Inn Room Revenues for Jameson Inns for 1999
compared to 1998 grew to $35.4 million from $33.7 million, or 5.0%. The growth
is due to an increase in ADR from $50.48 to $52.87 for these Inns and the
expansion of 11 of these Inns since January 1998, partially offset by a decrease
in the occupancy rate of these Inns from 63.6% in 1998 to 62.3% in 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 1999 was $1.1 million, compared to
$592,000 for 1998, due to additional costs resulting from our increased size and
more time spent by shared employees on our business matters as compared to
Jameson Hospitality's.

          Our property and other taxes and insurance expenses totaled $3.2
million in 1999, compared with $1.5 million for 1998. The increase is
attributable primarily to the increase in the number of Inns as a result of the
Signature acquisition in May 1999 and to the construction and expansion of
Jameson Inns.

          Our interest expense increased from $1.7 million in 1998 to $8.4
million in 1999 due to the increase in our average outstanding debt balance in
1999. This was the result primarily of our assumption of an additional $67.1

                                       43
<PAGE>

million of 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 $5.6 million in 1998 to $10.4
million in 1999, due primarily to the Signature acquisition in May 1999 and to
an increase in the number of operating Jameson Inns and the expansion of
existing Jameson Inns during 1999.

            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, 2000, 1999 and 1998 (unaudited):

                                               Year Ended December 31,
                                               -----------------------

                                            2000         1999          1998
                                            ----         ----          ----
                                                 (dollars in thousands)

Net income available to common
  stockholders                            $ 1,095      $ 5,383       $ 3,485

Add:

 Depreciation expense                      14,620       10,396         5,636

 Adjustment for equity share of hotel
  limited partnership                          --           24            --

 Amortization of offering costs               176           --            --

 Loss on disposals                             37          755           508

 Write-off of offering costs                   --          100            --

 Extraordinary item                            88           --           134

 Loss on impairment of real estate             --           --         2,507
                                          -------      -------       -------
Funds from operations                      16,016       16,658        12,270

Add:

 Loan fee amortization expense                597          228           114

Less:

 Additions to reserve for furniture,
  fixtures and equipment (1)               (3,844)      (3,057)       (1,551)

 Required loan principal repayments        (5,288)      (2,365)         (146)
                                          -------      -------       -------
Cash available for distribution           $ 7,481      $11,464       $10,687
                                          =======      =======       =======
__________
(1)  This amount equals 4% of the room revenues of our Inns for the respective
     period.

                                       44
<PAGE>

Liquidity and Capital Resources

          We expect to continue to develop additional Jameson Inns and to expand
existing Jameson Inns, as suitable opportunities arise. We will not undertake
such investments, however, unless 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 new
Jameson Inns and Signature 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, 2000, we had approximately $207.1 million in outstanding
debt.

          We have $14.5 million in lines of credit (the "Lines"). At December
31, 2000, we had drawn down $1.9 million under the Lines with $12.6 million
remaining available credit. Loans made under the Lines bear interest at rates
which are adjustable annually to a spread over the prime rate plus .375 to 1.0
percentage points. The minimum annual interest rate payable is 7% and the
maximum is 12%. The annual interest rates at December 31, 2000 ranged from
9.125% to 10%. $8.9 million of these loans are secured by mortgages on 9 Jameson
Inns, $5.0 million are secured by mortgages on 3 Signature Inns and $577,000 is
secured by billboards. Payments of interest are due monthly, and monthly
payments of principal and interest commence at various dates except for the line
secured by the billboards. Principal under each term loan under the Lines is
amortized using a 15- or 20-year period and is payable in full at various dates
through 2005. We use the Lines to purchase land and to supplement the financing
of construction and refurbishing costs, and certain other operating needs
including the payment of dividends and other operating expenses. We anticipate
that we will need additional financing to continue our historic growth pattern
and to maintain the current level of our dividend distributions.

          In December 1999 and January 2000, we refinanced indebtedness by
issuance of adjustable rate economic development revenue refunding bonds in the
aggregate principal amount of $12,115,000 secured by four Signature Inns. The
bonds mature on December 1, 2016, subject to prior optional and mandatory
redemption, and are subject to mandatory purchase under certain conditions. The
interest rates on the bonds adjust weekly and were 5.25% at December 31, 2000.

          Historically, we have utilized construction and long-term mortgage
financing to fund the balance of construction costs of Inns not funded under the
Line. For each new Jameson Inn to be built, we generally obtain a construction
loan for 60% to 65% of total construction costs. After an 18-month interest-only
period, each construction loan converts to a long-term mortgage financing upon
completion of the Inn without any further action by us, amortized over a 15 or
20 year period and payable in full seven years from its inception. The interest
rate on each of the loans adjusts annually, to rates ranging from the then
prevailing prime rate plus .125% to prime plus .375%. As of December 31, 2000,
the construction loans are secured by mortgages on five of the Jameson Inns
under construction.

          As of December 31, 2000, we had a total of five Jameson Inns under
construction with total remaining construction costs, excluding land and closing
costs, expected to total $20.6 million when the projects are complete. For these
properties, we had obtained commitments for construction loans totaling $12.2
million, with remaining availability of $10.9 million at December 31, 2000. The
nine Inn expansions planned for 2001 are expected to total $8.1 million when the
projects are complete. We intend to obtain construction loan commitments prior
to construction. 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.

          Since we presently intend to rely primarily on borrowings for
construction and permanent financing of new Inns and for the expansion of
existing Jameson Inns, the lack of sufficient financing on favorable terms and
conditions could prevent or significantly deter us from constructing new Jameson
Inns or expanding existing Jameson Inns. The availability of such financing
depends on a number of factors over which we have no control, including general
economic conditions, the economic and competitive environments of the
communities in which

                                       45
<PAGE>

the Inns are located and the level and stability of long-term interest rates. 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, 2000, no shares have been repurchased under
the program.

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

          We have four stock incentive plans in place. As of December 31, 2000,
264,149 shares of our common stock were reserved for future grants and options
to purchase 920,721 shares of our common stock were outstanding (including
522,471 which were exercisable). In addition, as of December 31, 2000, 415,370
shares of our common stock issued to certain key employees of Jameson and
Jameson Hospitality are restricted as to sale until fully 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. Jameson Hospitality raised its room rates for Jameson Inns by
approximately 1.6% in 1998, 2.7% in 1999 and 3.4% in 2000 and by approximately
2.7% for Signature Inns since May 1999. Nevertheless, competitive pressures have
limited, and may in the future limit, Jameson Hospitality's ability to raise
rates in the face of inflation.

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.

                                       46
<PAGE>

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
2001 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
2001 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
2001 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
2001 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-2

          Consolidated Balance Sheets as of December 31, 2000 and 1999   F-3

          Consolidated Statements of Operations for each of the three
          years ended December 31, 2000, 1999 and 1998                   F-4

          Consolidated Statements of Stockholders' Equity for each of
          the three years ended December 31, 2000, 1999 and 1998         F-5

          Consolidated Statements of Cash Flows for each of the three
          years ended December 31, 2000, 1999 and 1998                   F-6

          Notes to Consolidated Financial Statements                     F-8

               2.   Financial Statement Schedules

                                       47
<PAGE>

          Schedule III-Real Estate and Accumulated Depreciation          F-34

          Notes to Schedule III                                          F-40

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

               3.   Financial Statements of Jameson Hospitality, LLC

          Report of Independent Auditors                                 F-43

          Consolidated Balance Sheets as of December 31, 2000, and
          1999                                                           F-44

          Consolidated Statements of Operations for each of the three
          years ended December 31, 2000, 1999 and 1998                   F-45

          Consolidated Statements of Members Capital for each of the
          three years ended December 31, 2000, 1999 and 1998             F-46

          Consolidated Statements of Cash Flows for each of the three
          years ended December 31, 2000, 1999 and 1998                   F-47

          Notes to Consolidated Financial Statements                     F-49

          (b)  Reports on Form 8-K

               No reports on Form 8-K were filed during the fourth quarter of
          the year ended December 31, 2000.

          (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 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 -- Articles of Incorporation of the Registrant
                           incorporated by reference to Exhibit 3.1.1 to the
                           Registration Statement filed on Form S-11, File No.
                           33-71160

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

                                       48
<PAGE>

                    3.3 -  Articles of Amendment to the Articles of
                           Incorporation of the Registrant setting forth the
                           Designation of Preferences, Rights, Privileges and
                           Restrictions of the 9.25% Series A Cumulative
                           Preferred Stock the Registrant incorporated by
                           reference to Exhibit 2.1 to the Registrant's Form 10-
                           K/A1 (Amendment No. 1 to the Registrant's Annual
                           Report on Form 10-K) for the year ended December 31,
                           1993

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

                    3.5 -  Articles of Amendment to the Articles of
                           Incorporation of the Registrant amending the
                           Designation of Preferences, Rights, Privileges and
                           Restrictions of the 9.25% Series A Cumulative
                           Preferred Stock of the Registrant incorporated by
                           reference to Exhibit 3.6 to the Registrant's Annual
                           Report on Form 10-K for the year ended December 31,
                           1994

                    3.6 -  Articles of Amendment to the Articles of
                           Incorporation of the Registrant amending the
                           Designation of Preferences, Rights, Privileges and
                           Restrictions of the 9.25% Series A Cumulative
                           Preferred Stock incorporated by reference to Exhibit
                           3.5 to the Registration Statement on Form S-4, File
                           No. 333-74149

                    3.7 -  Articles of Amendment to the Articles of
                           Incorporation of the Registrant setting forth the
                           Designation of Preferences, Rights, Privileges and
                           Restrictions of the $1.70 Series S Cumulative
                           Convertible Preferred Stock incorporated by reference
                           to Exhibit 3.7 of Post-Effective Amendment No. 1 to
                           the Registration Statement on Form S-3, File No. 333-
                           20143

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

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

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

                    3.11 - Amendment No. 3 to the Bylaws of Registrant
                           incorporated by reference to Exhibit 4.8 to the
                           Registration Statement on Form S-3, File No. 333-
                           55916

                    4.1 -  Specimen certificate of Common Stock incorporated by

                                       49
<PAGE>

                           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 10.1 to the
                           Annual Report filed on Form 10-K for the year ended
                           December 31, 1993

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

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

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

                   10.5 -  Amendment No. 4 to Master Lease Agreement (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

                                       50
<PAGE>

                    incorporated by reference by Exhibit 10.8 to the
                    Registration Statement on Form S-4, File No. 333-74149

            10.9 -- 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

           10.10 -- 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

           10.11 -- Cost Reimbursement Agreement between Jameson Inns., Inc. and
                    Jameson 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

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

           10.13 -- 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

           10.14 -- 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

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

           10.16 -- 1994 Amendment to Jameson 1993 Stock Incentive Plan
                    incorporated by reference to Exhibit 10.11 to the Annual
                    Report filed on Form 10-K for the year ended December 31,
                    1995

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

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

                                       51
<PAGE>

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

           10.20 -- 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

           10.21 -- Indemnification and Hold Harmless Agreement between Jameson
                    Inns, Inc. and Jameson 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

           10.22 -- Indemnification and Hold Harmless Agreement between Jameson
                    Inns, Inc. and Jameson 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

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

           10.24 -- 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

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

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

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

                                       52
<PAGE>

           10.28 -- 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

           10.29 -- 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

           10.30 -- Asset Purchase Agreement by and among Jameson Outdoor
                    Advertising Company, Jameson Inns, Inc. and Jameson
                    Hospitality, LLC dated as of January 4, 1999 incorporated by
                    reference to Exhibit 10.30 to the Annual Report filed on
                    Form 10-K for the year ended December 31, 1999

           10.31 -- 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

           10.32 -- Loan Agreement between the City of Elkhart, Indiana and
                    Jameson Inns, Inc. dated as of December 1, 1999, relating to
                    the issuance of $3,305,000 of Adjustable Rate Economic
                    Development Revenue Refunding Bonds, Series 1999; Trust
                    Indenture between City of Elkhart, Indiana and Firstar Bank,
                    N.A. as Trustee, dated as of December 1, 1999; Escrow
                    Deposit Agreement dated December 22, 1999, by and among
                    Jameson Inns, Inc., the City of Elkhart, Indiana, Bank One
                    Trust Company, NA as Escrow Trustee and Bank One Trust
                    Company, NA as Prior Trustee; Specimen Irrevocable Letter of
                    Credit dated December 22, 1999 for the benefit of
                    bondholders for the account of Jameson Inns, Inc.;
                    Reimbursement Agreement between Jameson Inns, Inc. and
                    Firstar Bank, N.A. dated December 22, 1999; Mortgage,
                    Assignment of Rents and Security Agreement from Jameson
                    Inns, Inc. to Firstar Bank, N.A. dated as of December 22,
                    1999; Assignment of Leases and Rents from Jameson Inns, Inc.
                    to Firstar Bank, N.A. dated as of December 22, 1999;
                    Assignment and Subordination of Master Lease by Jameson
                    Inns, Inc. and 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,

                                       53
<PAGE>

                    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

           10.33 -- Schedule of documents substantially similar to Exhibit 10.32
                    incorporated by reference to Exhibit 10.33 to the Annual
                    Report filed on Form 10-K for the year ended December 31,
                    1999

           10.34 -- Employment contract with Thomas W. Kitchin dated July 27,
                    2000, incorporated by reference to Exhibit 10.1 to the
                    Report for the quarter ended September 30, 2000

           10.35 -- Employment contract with Craig R. Kitchin dated July 27,
                    2000, incorporated by reference to Exhibit 10.2 to the
                    Report for the quarter ended September 30, 2000

           10.36 -- Employment contract with William D. Walker dated July 27,
                    2000, incorporated by reference to Exhibit 10.3 to the
                    Report for the quarter ended September 30, 2000

           10.37 -- Employment contract with Steven A. Curlee dated July 27,
                    2000, incorporated by reference to Exhibit 10.4 to the
                    Report for the quarter ended September 30, 2000

           10.38 -- 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

           10.39 -- 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

           10.40 -- Loan Agreement dated December 27, 2000, between Jameson
                    Properties, LLC and First Bank, Peoria, Illinois for
                    Signature Inn, Normal, Illinois; Mortgage and Security
                    Agreement; Assignment of Leases and Rents; Subordination
                    Agreement; Tenant Estoppel Agreement; Indemnity Agreement;
                    and Promissory Note A for $6,000,000; Promissory Note B for
                    $5,000,000

           10.41 -- Schedule of documents substantially similar to Exhibit 10.40

           10.42 -- 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

           10.43 -- 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

           10.44 -- Schedule of documents substantially similar to Exhibit 10.43

            21.1 -- Subsidiaries of the Registrant

            23.1 -- Consent of Ernst & Young LLP


                                       54
<PAGE>

                              Jameson Inns, Inc.


                       Consolidated Financial Statements


                    Years ended December 31, 2000 and 1999



                                   Contents


<TABLE>
<CAPTION>

<S>                                                              <C>
Report of Independent Auditors..................................  F-2

Consolidated Financial Statements

Consolidated Balance Sheets.....................................  F-3
Consolidated Statements of Operations...........................  F-4
Consolidated Statements of Stockholders' Equity.................  F-5
Consolidated Statements of Cash Flows...........................  F-6
Notes to Consolidated Financial Statements......................  F-8

</TABLE>

                                      F-1
<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, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.



February 8, 2001
Atlanta, Georgia

                                      F-2
<PAGE>

                              Jameson Inns, Inc.

                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                         December 31
                                                    2000             1999
                                            ---------------------------------
<S>                                         <C>                <C>
Assets
Operating property and equipment                $365,243,811     $318,601,921
Property and equipment held for sale               7,171,688        2,358,504
Less accumulated depreciation                    (38,324,641)     (24,377,453)
                                            ---------------------------------
                                                 334,090,858      296,582,972

Cash                                               1,976,592        2,531,009
Restricted cash                                      636,126       12,616,482
Lease revenue receivable                           5,782,118        6,941,315
Deferred finance costs, net                        3,690,409        2,942,324
Other assets                                         549,382        1,237,643
                                            ---------------------------------
                                                $346,725,485     $322,851,745
                                            =================================

Liabilities and Stockholders' equity
Mortgage notes payable                          $207,145,362     $173,957,998
Accounts payable and accrued expenses                553,443        1,269,334
Accounts payable to affiliates                     6,820,370        6,475,510
Accrued interest payable                           1,461,280          972,544
Accrued property taxes                             2,336,416        2,178,719
Preferred stock dividends payable                  1,667,183        1,694,595
                                            ---------------------------------
                                                 219,984,054      186,548,700

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        1,272,727
  1,272,727 shares issued and outstanding



 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 (2,256,000 in            2,191,500        2,256,000
  1999) issued and outstanding




 Common stock, $.10 par value, 40,000,000
  shares authorized, 11,554,238 shares
  (11,083,952 in 1999) issued and                  1,155,424        1,108,395
  outstanding


 Additional paid-in capital                      123,148,771      132,692,914
 Retained deficit                                 (1,026,991)      (1,026,991)
                                            ---------------------------------
Total stockholders' equity                       126,741,431      136,303,045
                                            ---------------------------------
                                                $346,725,485     $322,851,745
                                            =================================
</TABLE>

See accompanying notes.

                                      F-3
<PAGE>

                              Jameson Inns, Inc.

                     Consolidated Statements of Operations


<TABLE>
<CAPTION>

                                                        Year ended December 31
                                                  2000            1999           1998
                                          -----------------------------------------------
 <S>                                      <C>                 <C>            <C>
Lease revenue                                  $43,231,727     $34,668,532    $18,229,748

Expenses:
 Property and other tax expense                  3,670,841       2,634,056      1,059,040
 Insurance expense                                 869,601         566,351        481,932
 Depreciation                                   14,619,521      10,396,468      5,636,079
 General and administrative expenses             1,405,343       1,116,520        574,688
 (Gain) loss on disposal of real
  estate                                          (283,258)        755,214        507,718
 Amortization of offering costs                    176,281          99,724              -
 Loss on impairment of real estate                       -               -      2,507,000
                                          -----------------------------------------------
Total expenses                                  20,458,329      15,568,333     10,766,457
                                          -----------------------------------------------
Income from operations                          22,773,398      19,100,199      7,463,291
Interest expense, net of capitalized
 amounts                                        14,942,749       8,429,007      1,656,240
Equity in income of hotel limited
 partnership                                             -          75,462              -
Other income                                        48,085          23,913              -
                                          -----------------------------------------------
Income before extraordinary loss                 7,878,734      10,770,567      5,807,051
Extraordinary loss-early
 extinguishment of debt                             87,816               -        133,951
                                          -----------------------------------------------
Net income                                       7,790,918      10,770,567      5,673,100
Less preferred stock dividends                   6,696,144       5,387,248      2,188,050
Net income attributable to common         -----------------------------------------------
 stockholders                                  $ 1,094,774     $ 5,383,319    $ 3,485,050
                                          ===============================================

Per common share:
 Income before extraordinary loss:
   Basic                                       $       .11     $       .51    $       .37
   Diluted                                     $       .10     $       .51    $       .36
 Net income:
   Basic                                       $       .10     $       .51    $       .36
   Diluted                                     $       .10     $       .51    $       .35
</TABLE>



See accompanying notes.

                                      F-4
<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, 1998              $         -   $        -     $  977,408   $ 75,210,464   $(1,026,991)   $ 75,160,881
 Issuance of preferred and common
  stock, net of offering expense          1,200,000            -          4,253     27,839,002                    29,043,255
 Exercise of stock options                                     -          5,930        353,089                       359,019
 Vesting of restricted stock grants                            -          1,990         60,442                        62,432
 Common stock dividends ($0.94 per
  share)                                                       -              -     (3,784,845)   (5,457,255)     (9,242,100)
 Preferred stock dividends ($1.82
  per share)                                                   -              -     (1,972,205)     (215,845)     (2,188,050)
 Net income                                                    -              -                    5,673,100       5,673,100
                                        ------------------------------------------------------------------------------------
Balance at December 31, 1998              1,200,000                     989,581     97,705,947    (1,026,991)     98,868,537
 Issuance of preferred and common
  stock, net of offering expense             72,727    2,256,000        117,341     39,585,070             -      42,031,138
 Exercise of stock options                        -            -          1,501        100,302             -         101,803
 Vesting of restricted stock grants               -            -            (28)        67,653             -          67,625
 Common stock dividends ($.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
                                        ====================================================================================
</TABLE>

See accompanying notes.

                                      F-5
<PAGE>

                               Jameson Inns, Inc.

                     Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                    Year ended December 31
                                             2000            1999             1998
                                     -------------------------------------------------

Operating activities
<S>                                    <C>              <C>             <C>
Net income                               $  7,790,918    $ 10,770,567     $  5,673,100
Adjustments to reconcile net income
 to cash provided by operating
 activities:
  Extraordinary loss                           87,816               -          133,951
  Depreciation and amortization            15,216,932      10,624,136        5,750,186
  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                    (283,258)        755,214          507,718
  Stock-based compensation expense            304,176          67,625           62,432
  Loss on impairment of real estate                 -               -        2,507,000
  Changes in assets and liabilities
   increasing (decreasing) cash:
     Lease revenue receivable               1,159,197      (4,651,562)        (832,081)
     Restricted cash                       11,980,356         882,592                -
     Other assets                             511,981        (894,526)        (206,712)
     Accounts payable and accrued            (715,891)        730,989          (13,681)
      expenses
     Accounts payable to affiliates           344,860       4,605,402          (98,778)
     Accrued interest payable                 488,736          (7,893)         185,679
     Accrued property taxes and
      other accrued liabilities               138,733         295,263          176,294
                                     -------------------------------------------------
Net cash provided by operating             37,200,837      23,202,069       13,845,108
 activities

Investing activities
Acquisition of Signature Inns and
 billboards, net                                    -          92,092                -
Proceeds from disposition of land,
 property and equipment                     2,060,575       1,441,586                -

Additions to property and equipment       (53,878,540)    (41,761,690)     (55,844,810)
                                     -------------------------------------------------
Net cash used in investing activities     (51,817,965)    (40,228,012)     (55,844,810)
</TABLE>

                                      F-6
<PAGE>

                               Jameson Inns, Inc.

               Consolidated Statements of Cash Flows (continued)


<TABLE>
<CAPTION>
                                                              Year ended December 31
                                                       2000            1999             1998
                                                ------------------------------------------------
<S>                                            <C>                <C>             <C>
Financing activities
Common stock dividends paid                        $(11,258,870)   $(10,149,377)    $ (9,242,100)
Preferred stock dividends paid                       (6,723,556)     (4,386,403)      (1,494,300)
Proceeds from issuance of preferred
 and common stock, net of offering
 expense                                                499,869         977,230       29,043,255
Proceeds from exercise of stock
 options                                                      -         101,803          359,019
Conversion of Series S preferred
 stock                                                 (201,563)              -                -
Proceeds from mortgage notes payable                 75,711,945      62,003,310       53,936,020
Payment of deferred finance costs                    (1,440,533)     (2,001,251)        (576,922)
Payments on mortgage notes payable                  (42,524,581)    (27,488,737)     (29,863,474)
Net cash provided by financing                  ------------------------------------------------
 activities                                          14,062,711      19,056,575       42,161,498
                                                ------------------------------------------------

Net change in cash                                     (554,417)      2,030,632          161,796
Cash at beginning of year                             2,531,009         500,377          338,581
                                                ------------------------------------------------
Cash at end of year                                $  1,976,592    $  2,531,009     $    500,377
                                                ================================================

Supplemental information
Interest paid, net of interest
 capitalized                                       $ 15,258,820    $  8,746,028     $  2,252,778
                                                ================================================
State income and franchise taxes paid              $    213,004    $     16,226     $     17,353
                                                ================================================
</TABLE>

See accompanying notes.

                                      F-7
<PAGE>

                              Jameson Inns, Inc.

                  Notes to Consolidated Financial Statements

                               December 31, 2000

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, 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.

At December 31, 2000, there were 104 Jameson Inns in operation in nine
Southeastern states and 26 Signature Inns in operation in six Midwestern states,
with a total of 8,351 rooms.  In 2001, five additional Jameson Inns will be
developed and nine expansions of existing Jameson Inns will be completed.

2. Accounting Policies

The Company has several business relationships with Jameson Hospitality, LLC
("JH") including contracts to construct the new Inns (see Note 11) and the lease
to operate the Inns (see Note 6). JH is wholly-owned by Thomas W. Kitchin,
chairman and chief executive officer of the Company, and members of his family.
JH is the successor to Jameson Development Company, LLC and Jameson Operating
Company II, LLC which previously held the contracts and the lease, respectively
and Kitchin Investments, Inc., which was merged into JH on December 31, 1999.

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-8
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

2. Accounting Policies (continued)

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.

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 $1,686,879 and $1,596,925, were
capitalized in 2000 and 1999, 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 (see Note 5).

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 $963,600 and $397,018
as of December 31, 2000 and 1999, respectively.

                                      F-9
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

2. Accounting Policies (continued)

Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), and has operated as such since January 1, 1994.
As a result, the Company is not subject to federal income taxes to the extent
that it distributes annually at least 95% (90% in 2001) of its taxable income to
its shareholders and satisfies certain other requirements defined in the Code.

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

Stock-Based Compensation

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

See Note 8 for pro forma disclosures using the fair value method as described in
Financial Accounting Standards Board Statement No. 123, Accounting for Stock-
Based Compensation ("FAS 123").

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, 2000 and 1999, the carrying value of the
Company's financial instruments approximated their fair value.

                                     F-10
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

2. Accounting Policies (continued)

Restricted Cash

Restricted cash at December 31, 1999 primarily represents amounts that have been
funded from bond issuances, held in trust, to retire four outstanding bonds
payable.  In January 2000, $12,115,000 of the restricted cash was used to retire
such bonds.  At December 31, 2000, the restricted cash balance is restricted
under the requirements of the bond indentures.

Principles of Consolidation

Intercompany transactions among the entities included in the consolidated
financial statements have been eliminated. As of December 31, 2000, 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, therefore, the operations of the partnership beginning
December 28, 1999 are consolidated in the Company's financial statements.

Earnings Per Share

Net income attributable to common stock is reduced by all preferred stock
dividends declared through the end of the period.

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

                                     F-11
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

2. Accounting Policies (continued)

Earnings Per Share (continued)

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.
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.

3. Property and Equipment

Property and equipment consists of the following at December 31:

                                                     2000              1999
                                            -----------------------------------
      Land and improvements                      $ 58,922,401      $ 57,449,978
      Buildings                                   253,407,237       208,229,439
      Furniture, fixtures and equipment            42,816,001        30,262,230
      Billboards                                    2,783,076         2,537,437
      Construction in process                       7,315,096        20,122,837
                                            -----------------------------------
      Operating property and equipment            365,243,811       318,601,921
      Property and equipment held for sale          7,171,688         2,358,504
      Accumulated depreciation                    (38,324,641)      (24,377,453)
                                            -----------------------------------
                                                 $334,090,858      $296,582,972
                                            ===================================

In 1996, the Company adopted Financial Accounting Standards Board Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations 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 1998, the
Company recognized a $2,507,000 loss on impairment of real estate related to one
of its properties. In 1999 the property was sold and the sales price
approximated its carrying value. No impairment losses have been recognized in
2000 or 1999.

                                     F-12
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

3. Property and Equipment (continued)

Based on a review of its investment portfolio at December 31, 2000, the Company
has determined that two 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.

At December 31, 1999, one property that had been determined as not meeting the
Company's investment criteria was classified as held for sale on the Company's
balance sheet. In February 2000, the Company closed on the sale of this hotel
property.  The sales price, less selling costs, approximated the carrying
amount.

4. Merger with Signature Inns, Inc.

On May 7, 1999, the Company completed its merger with Signature Inns, Inc.  In
the merger, the Company acquired 25 Signature Inns and a 40% general partnership
interest in a partnership which owned one Signature Inn.  Immediately prior to
the merger, the Signature operating assets were sold to, and the liabilities
pertaining to the operations of the Signature Inns were assumed by JH.  In
connection with the merger, the Company entered into a new master lease with  JH
covering the 25 wholly-owned Signature Inns (Note 6).

In the merger, holders of Signature common stock received one-half of a share of
Jameson common stock and $1.22 in cash for each share of Signature common stock.
Holders of Signature Series A Preferred Stock received one share of Jameson
Series S Preferred Stock for each share of Signature Series A Preferred Stock.
In the merger, the Company assumed all of the outstanding indebtedness of
Signature, except for $2.1 million which was repaid at closing with additional
borrowings under the Company's line of credit.  As of May 7, 1999, the debt
assumed totaled $67.1 million and was secured by mortgages on twenty-four of the
Signature Inns.

                                     F-13
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

4. Merger with Signature Inns, Inc. (continued)

The purchase price of Signature approximated $46.3 million, consisting of $2.6
million in cash, the issuance of 1,051,846 shares of Jameson Common Stock (at
$9.125 per share), 2,256,000 shares of Jameson Series S Preferred Stock (at
$13.375 per share), and merger related costs of approximately $4.0 million.  The
purchase price was allocated to the fair value of the net assets acquired as
follow:

           Cash                                       $   6,721,951
           Restricted cash                                1,384,074
           Hotel limited partnership                      1,079,675
           Property and equipment                       108,332,245
           Amount due from affiliates                       398,447
           Accounts payable and accrued expenses           (277,580)
           Accrued interest payable                        (630,001)
           Accrued property taxes                        (1,411,796)
           Mortgage notes payable                       (69,231,797)
                                                      -------------
                                                      $  46,365,218
                                                      =============

The merger was accounted for as a purchase of Signature by Jameson as prescribed
by Accounting Principles Board Opinion No. 16, Business Combinations.
Accordingly, the historical results of Jameson include the effects of the merger
beginning May 8, 1999.

                                     F-14
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

4. Merger with Signature Inns, Inc. (continued)

The following presents the unaudited pro forma results of operations for 1999
and 1998 as if the purchase and all related transactions were consumed on
January 1, of the respective period for the year ended December 31.  Such
information reflects the allocation of the purchase price.

                                                      1999             1998
                                               --------------------------------

     Pro forma:
      Lease revenues                                 $39,626,806    $35,081,173
      Income before extraordinary items               10,616,738      9,481,780
      Extraordinary items                                      -        133,951
                                               --------------------------------
     Net income                                       10,616,738      9,347,829
     Preferred stock dividends                         6,736,336      6,023,250
                                               --------------------------------
     Net income attributable to common stock         $ 3,880,402    $ 3,324,579
                                               ================================

     Pro forma earnings per share:
      Basic earnings per common share:
        Income before extraordinary items            $       .36    $       .32
        Extraordinary items                                    -           (.01)
                                               --------------------------------
        Net income                                   $       .36    $       .31
                                               ================================

      Diluted earnings per common share:
        Income before extraordinary items            $       .35    $       .31
        Extraordinary items                                    -           (.01)
                                               --------------------------------
        Net income                                   $       .35    $       .30
                                               ================================

                                     F-15
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

5. Acquisition of Outdoor Advertising Assets of Jameson Hospitality, LLC

On April 2, 1999, the Company completed the acquisition of the outdoor
advertising assets and certain related operations of JH.  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.  These billboards were leased to JH and continue to be used
for similar types of advertising.  Consideration of $2,381,000 paid to JH
consisted of (i) 72,727 newly issued shares of the Company'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.

6. The Leases

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

The Jameson and Signature leases, which expire December 31, 2010 and 2012,
respectively, provide for payment of Base Rent plus Percentage Rent. Base Rent
is payable monthly and equals $264 and $394 per month for the Jameson Inns and
Signature Inns, respectively, based upon rooms available at the beginning of the
relevant month.

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 JH during the relevant period.  For Jameson Inns, the percentage is
39% of such revenues up to $21.91 per day per room in 2000, plus 65% of all
additional average daily room rental revenues.  For Signature Inns, the
percentage is 37% of such revenues up to $36.76 per day per room in 2000, 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-16
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

6. The Leases (continued)

Total rent for the Jameson Inns in any calendar year may not exceed 47% of total
room rental revenues for that year.  The $21.91 and $36.76 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, 2001 was $22.65 and $38.00 for Jameson Inns and
Signature Inns, respectively.

Base rent totaled $28,900,248, $20,998,052 and $10,501,920 in 2000, 1999, and
1998, respectively, and assuming no change in rooms available after December 31,
2000, the base rent for 2001 and thereafter would total $31,215,528 per year
until the Lease expires.

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

                                     F-17
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)



7. Mortgage Notes Payable

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

<TABLE>
<CAPTION>
                                                              2000            1999
                                                          ------------------------------
<S>                                                       <C>             <C>
Notes payable:
 Terms ranging from four to twenty-one years, due in
   monthly installments of principal and interest with
   remaining unpaid balances payable at maturity, which
   range from 2001 to 2017.  At December 31, 2000 the
   Company had $3.8 million of availability. Interest
   rates are adjusted annually and range from 8.62% to
   10.75% and are mainly adjustable to a spread above
   the prime rate or Treasury securities at December 31,
   2000. Secured by mortgages on 103 Inns.                  $175,051,374   $108,534,789


Term of twenty years and interest accrues at 3.75%
   above a weekly average yield on Treasury securities,
   adjusted annually (9.4% at December 31, 2000).
   Principal and interest payments are due monthly
   through maturity in 2019. Secured by mortgages on
   14 Inns.                                                   16,427,808     16,780,358


Terms of seventeen years due in annual installments of
   principal and bi-annual installments of interest with
   any unpaid balances payable in December 2016.
   Interest rates are adjusted weekly and were 5.25% at
   December 31, 2000. Secured by mortgages on 4 Inns.         11,805,000     12,115,000


Term of five years due in monthly installments of
   principal and interest with unpaid balance payable at
   maturity in December 2004. Interest rate is fixed at
   9.50%. Secured by Company billboards.                         531,924        646,984
</TABLE>


                                     F-18
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

7. Mortgage Notes Payable (continued)

<TABLE>
<CAPTION>
                                                                        2000         1999
                                                                     ------------------------
<S>                                                                   <C>          <C>
Lines of credit:
 $8.92 million line of credit convertible to term notes due
   at various dates through 2004. At December 31, 2000, the
   Company had $7.0 million of availability. The Line bears
   interest at initial annual rates ranging from 8.875% to 9.0%,
   adjusted annually to the prime rate plus .375% to .5%, with
   a floor of 7% and a cap of 12% (9.125% to 10% at
   December 31, 2000). Payments of interest are due monthly,
   and monthly payments of principal and interest commence
   at various dates using a 15 to 20-year amortization period
   and payable at various maturities in 2003 to 2004. Secured
   by mortgages on 9 Inns.                                              1,925,227   13,332,203


 $5.0 million secured line of credit available to draw on at
   December 31, 2000. The line bears interest at initial
   annual rates of 9.625%, adjusted annually to prime plus .625%.
   Payments of interest are due monthly through December
   2001. Beginning January 2002, principal and interest are
   due with the principal balance payable at maturity in
   December 2005.                                                               -            -


 $600,000 line of credit secured by Company billboards.  At
   December 31, 2000, the Company had $576,914 available
   to borrow. The line bears interest at prime plus 1% (10.5%
   at December 31, 2000). Payments of interest are due
   monthly with the principal balance payable upon maturity
   in December 2001.                                                       23,086       23,082


Construction obligations:
 $12.2 million total commitments.  As of December 31, 2000,
   $10.8 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 15-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, 2000 ranged from
   8.375% to 9.875%. Secured by 5 Inns under construction.              1,380,943   10,410,577
</TABLE>


                                     F-19

<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>
<S>                                                                    <C>                <C>
 $12,115,000 of bonds payable at December 31, 1999, secured
   by restricted cash, with interest at 9.8%.  In January
   2000, all such bonds were retired utilizing the Company's
   restricted cash.                                                               -         12,115,000
                                                                       -------------------------------
                                                                       $207,145,362       $173,957,998
                                                                       ===============================
</TABLE>


                                     F-20
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)




7. Mortgage Notes Payable (continued)

At December 31, 2000 and 1999, approximately $333.0 and $286.5 million,
respectively, of the Company's net book value of property and equipment
collateralized the mortgage notes payable. At December 31, 2000 and 1999, 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, 2000:



             2001                                    $  7,682,345
             2002                                      17,848,943
             2003                                      15,634,465
             2004                                      20,290,213
             2005 and thereafter                      145,689,396
                                                     ------------
                                                     $207,145,362
                                                     ============


As a result of the early extinguishment of certain debt in 2000 and 1998, the
Company incurred extraordinary losses of $87,816 and $133,951, in 2000 and 1998,
respectively, comprised of the unamortized deferred finance costs and prepayment
penalties.

8. Stockholders' Equity

Preferred Stock

On May 7, 1999, in connection with the Signature merger, the Company issued
2,256,000 shares of 8.5% Series S Cumulative Convertible Preferred Stock
("Series S Preferred Stock") at $13.375 per share. The Series S Preferred Stock
is senior to all shares of the Company's common stock and is on a parity with
the Company's 9.25% Series A Preferred Stock ("Series A Preferred Stock").

                                     F-21
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)




8. Stockholders' Equity (continued)

Preferred Stock (continued)

On March 18, 1998, the Company completed the sale of 1,200,000 newly issued
shares of 9.25% Series A Preferred Stock at $25 per share before underwriting
discounts and expenses. Net proceeds of approximately $28.5 million were used to
repay certain existing mortgage indebtedness at that date.

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 on or 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.

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

                                     F-22
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)




8. Stockholders' Equity (continued)

Preferred Stock (continued)

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.

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 JH. 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,
2000 the Company had a total of 1,465,240 shares reserved for issuance,
including 264,149 shares available for future option grants and restricted stock
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.

                                     F-23
<PAGE>

                              Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)




8. Stockholders' Equity (continued)

Stock Options (continued)

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, 2000, 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-24
<PAGE>

                               Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)


8. Stockholders' Equity (continued)

Stock Options (continued)

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>
Options outstanding December 31, 1997                    807,851         $ 6.65 - $11.75            $ 9.87

 Granted in 1998                                         175,000         $9.125 - $11.375           $10.63
 Exercised in 1998                                       (50,737)        $ 6.65 - $10.875           $ 7.07
 Forfeited in 1998                                       (84,000)        $10.00 - $11.75            $11.39
                                                ----------------
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
                                                ================

Options exercisable:
 December 31, 1998                                       417,714         $ 6.65 - $11.75            $ 8.71
                                                ================
 December 31, 1999                                       458,971         $ 6.65 - $11.75            $ 9.02
                                                ================
 December 31, 2000                                       522,471         $ 6.94 - $11.75            $ 9.22
                                                ================
</TABLE>
The average contractual life remaining on options outstanding at December 31,
2000 was 6.89 years.


                                     F-25

<PAGE>

                               Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)



8. Stockholders' Equity (continued)

Restricted Stock

In 2000, 1999 and 1998, the Company awarded 334,500, 4,750, and 20,821 shares,
respectively of Common Stock to certain officers and employees of the Company
and JH, under the provisions of the 1996 Plan. The shares vest ten years after
date of grant, assuming the individual is continuously employed by one of the
two companies at that date. Holders are entitled to all dividends prior to
forfeiture or full vesting. As of December 31, 2000, 415,370 restricted shares
of common stock remain outstanding; the balance were forfeited and returned to
the Company.

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 $304,176 in
2000, $67,625 in 1999 and $62,432 in 1998.

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
2000, 1999 and 1998; risk-free interest rates of 4.10% to 6.80%; a dividend
yield of 10% in 2000 and 8% in 1999 and 1998; 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.

                                     F-26

<PAGE>

                               Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)



8. Stockholders' Equity (continued)

Pro Forma Effects of Stock-Based Compensation (continued)

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>
                                                                        2000           1999           1998
                                                                      -------------------------------------
<S>                                                                   <C>            <C>            <C>
Pro forma net income (in 000's)                                        $ 989         $5,310         $3,419
Pro forma earnings per share-basic                                     $ .09         $  .50         $  .35
Pro forma earnings per share-diluted                                   $ .09         $  .50         $  .34
</TABLE>

Dividend Reinvestment Plan

In April 1995, the Company registered 200,000 shares of common stock for
purchase under the Dividend Reinvestment and Stock Purchase Plan. The plan
allows existing shareholders to reinvest their dividends in additional shares
purchased at a 5% discount from the average market price of the shares. The plan
also allows existing shareholders to make additional cash purchases at the
current market price of common stock of up to $5,000 per calendar quarter.
During 2000, 1999, and 1998, 72,102, 60,459, and 41,726 shares, respectively,
were purchased through dividend reinvestments and additional cash purchases.



                                     F-27
<PAGE>

                               Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)



8. Stockholders' Equity (continued)

Warrants

As a part of its initial public offering, the Company issued and had warrants
outstanding to purchase up to 260,000 shares of Common Stock at an exercise
price of $14.85 per share; the warrants were exercisable in whole or in part
from date of grant until January 26, 1999. The warrants expired on that date
with no exercises.


                                     F-28
<PAGE>

                               Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)



9. Earnings Per Share

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

<TABLE>
                                                        2000                    1999                    1998
                                                   -------------------------------------------------------------
<S>                                                  <C>                     <C>                     <C>
Numerator
Income from continuing operations                    $ 7,878,734             $10,770,567             $ 5,807,051
Extraordinary loss                                       (87,816)                      -                (133,951)
                                                   -------------------------------------------------------------
Net income                                             7,790,918              10,770,567               5,673,100
Preferred stock dividends                             (6,696,144)             (5,387,248)             (2,188,050)
Numerator for basic earnings per share-income
 available to common stockholders                    $ 1,094,774             $ 5,383,319             $ 3,485,050
                                                   =============================================================
Denominator
Weighted average shares outstanding                   11,488,104              10,628,980               9,836,624
Less:  Unvested restricted shares                       (406,937)                (85,685)                (64,734)
                                                   -------------------------------------------------------------
Denominator for basic earnings per share              11,081,167              10,543,295               9,771,890

Plus: Effect of dilutive securities:
 Employee and director stock options                       6,323                  46,849                  95,497
 Unvested restricted shares                              363,765                  67,402                  61,509
                                                   -------------------------------------------------------------
Total dilutive potential common shares                   370,088                 114,251                 157,006
                                                   -------------------------------------------------------------
Denominator for diluted earnings per
 share-adjusted weighted average shares and
 assumed conversions                                  11,451,255              10,657,546               9,928,896
                                                   =============================================================
Basic Earnings Per Common Share
Income before extraordinary loss                     $       .11             $       .51             $      0.37
Extraordinary loss                                          (.01)                      -                    (.01)
                                                   -------------------------------------------------------------
Net income                                           $       .10             $       .51             $      0.36
                                                   =============================================================
Diluted Earnings Per Common Share
Income before extraordinary loss                     $       .10             $       .51             $      0.36
Extraordinary loss                                             -                       -                   (0.01)
                                                   -------------------------------------------------------------
Net income                                           $       .10             $       .51             $      0.35
                                                   =============================================================
</TABLE>


                                     F-29


<PAGE>

                               Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)



9. Earnings Per Share (continued)

Options to purchase 522,471, 521,833, and 503,833, shares of Common Stock during
2000, 1999, and 1998, respectively, and warrants to purchase 260,000 shares of
Common Stock during 1998 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, 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.

10. Income Taxes

The Company recorded no provision for federal income taxes in 2000, 1999, or
1998 due to its REIT status. State tax expense, which is not material, is
included in property and other tax expense. At December 31, 2000, 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, $.97, and
$.94 per share in 2000, 1999, and 1998, respectively.  Of these dividends, $.35,
$.48, and $.72 per share represents ordinary income and $.63, $.49, and $.22 per
share represents return of capital in 2000, 1999, and 1998, respectively.

11. Additional Related Party Transactions

JH identifies sites and constructs the Inns for the Company. The Company paid JH
and its predecessor companies a total of $61,082,972, $27,342,000, and
$41,055,000 for construction of new Inns, Inn expansions, and renovations during
the years ended December 31, 2000, 1999, and 1998, respectively.



                                     F-30


<PAGE>

                               Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)



11. Additional Related Party Transactions (continued)

The Company shares employees and office space with JH, which until December 31,
1999 was wholly owned by Thomas W. Kitchin, the Company's chairman and chief
executive officer. On December 31, 1999, Kitchin Investments, Inc., merged with
JH and the cost reimbursement was assumed by JH effective December 31, 1999.
Under the Cost Reimbursement Agreement, JH charged the Company approximately
$962,000, $417,000, and $200,000 for its allocation of salary, office overhead,
and other general and administrative costs in 2000, 1999, and 1998,
respectively.

12. Other Commitments and Contingencies

As of December 31, 2000, the Company had executed or expected to execute
construction contracts with JH, for new Inns or expansions totaling $20.6
million, of which $13.3 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 $245,900, $101,500, and $71,600 in 2000,
1999, and 1998, respectively, is included in general and administrative expense
in the Company's statements of operations.  The leases require future minimum
payments as follows:

               2001                                 $  461,277
               2002                                    449,576
               2003                                    272,707
               2004                                    212,346
               2005                                    212,346
               Thereafter                            6,032,830
                                               ---------------
                                                    $7,641,082
                                               ===============

The rent expense under the office lease is paid by JH and is allocated under the
Cost Reimbursement agreement described in Note 11.



                                     F-31

<PAGE>

                               Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)



12. Other Commitments and Contingencies (continued)

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.

13. Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                      2000 Quarters
                                         ---------------------------------------------------------------------
                                                First            Second            Third            Fourth
                                         ---------------------------------------------------------------------
<S>                                        <C>                 <C>              <C>              <C>
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
Earnings per common share:
 Net income:                                          (.03)              .14              .13             (.13)
  Basic                                               (.03)              .13              .12             (.13)
  Diluted

<CAPTION>

                                                                      1999 Quarters
                                         ---------------------------------------------------------------------
                                                First           Second            Third            Fourth
                                         ---------------------------------------------------------------------
<S>                                        <C>                 <C>              <C>              <C>
Lease revenue                                   $4,875,038        $9,322,064      $11,379,166      $ 9,092,264
Net income                                       1,627,806         3,811,516        3,983,628        1,347,617
Earnings per common share:
 Net income:
  Basic                                         $     0.10        $     0.24      $      0.21          ($0.03)
  Diluted                                       $     0.09        $     0.24      $      0.21          ($0.03)
</TABLE>


                                     F-32


<PAGE>

                               Jameson Inns, Inc.

            Notes to Consolidated Financial Statements (continued)



13. Quarterly Results of Operations (Unaudited) (continued)

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


                                     F-33

<PAGE>

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation

As of December 31, 2000
                                                                                                           Gross Amount at Which
                                                                                Cost Capitalization         Carried at Close of
                                                        Initial Cost         Subsequent to Acquisition            Period
                                                    ----------------------   -------------------------    ----------------------
                                                               Buildings,                   Buildings,               Buildings,
                                        Mortgage               Equipment &                 Equipment &              Equipment &
   Property                               Debt         Land    Improvement      Land       Improvement      Land    Improvement
   ---------------------------------   ---------    ---------  -----------   -----------   -----------    --------- ------------
<S>                                    <C>          <C>        <C>           <C>           <C>            <C>       <C>
Georgia:
     Albany                           $1,269,519     $265,344           $0       $92,307    $1,774,337     $357,652   $1,774,337
     Americus                          1,573,108      131,629            0        72,297     2,619,348      203,926    2,619,348
     Bainbridge                        1,379,307      125,000            0             0     1,689,018      125,000    1,689,018
     Brunswick                         1,577,603      175,275            0             0     1,716,158      175,275    1,716,158
     Calhoun                           1,475,317      113,722            0        18,008     1,747,933      131,730    1,747,933
     Carrollton                        1,485,064      225,000            0        50,029     1,698,308      275,029    1,698,308
     Commerce                          1,038,053      304,809            0         1,300     1,352,190      306,109    1,352,190
     Conyers                           1,753,375      301,128            0             0     2,288,563      301,128    2,288,563
     Covington                           973,606      141,452            0        22,399     1,366,404      163,851    1,366,404
     Dalton                            1,734,901      546,257            0         1,550     2,278,389      547,807    2,278,389
     Douglas                             986,839      120,033            0             0     1,203,039      120,033    1,203,039
     Dublin (f)                           10,000            0            0             0     1,442,456            0    1,442,456
     Eastman (g)                         658,755       87,883            0        13,917     1,469,684      101,800    1,469,684
     Fitzgerald (g)                      900,244      133,515            0             0     1,144,446      133,515    1,144,446
     Greensboro (g)                    1,103,949      109,840            0        17,394     1,551,909      127,234    1,551,909
     Hartwell                            775,518       85,000            0        13,460     1,431,948       98,460    1,431,948
     Jesup                             1,583,514       89,917            0        14,239     2,116,434      104,156    2,116,434
     Kingsland                         1,052,403      283,432            0             0     1,440,552      283,432    1,440,552
     Lagrange                          1,983,919      200,073            0             0     2,012,581      200,073    2,012,581
     Macon (f)                           629,227      288,518            0             0     1,399,908      288,518    1,399,908
     Newnan                            2,037,951      529,377            0             0     3,787,978      529,377    3,787,978
     Oakwood                             778,907      258,903            0             0     1,371,994      258,903    1,371,994
     Perry (f)                            35,000      238,325            0             0     1,413,004      238,325    1,413,004
     Pooler                            1,752,434      501,223            0             0     3,115,722      501,223    3,115,722
     Rome                              2,361,616      254,849            0             0     3,760,666      254,849    3,760,666
     Statesboro                          775,518      132,817            0        21,032     1,649,117      153,849    1,649,117
     Thomaston                         1,483,972      157,181            0       (50,110)    2,131,611      107,071    2,131,611
     Thomasville                       1,120,392      331,161            0             0     1,536,195      331,161    1,536,195
     Valdosta                          1,479,282      166,632            0             0     1,644,825      166,632    1,644,825
     Warner Robins                     1,835,125      365,853            0             0     2,073,065      365,853    2,073,065
     Washington                          775,518      107,780            0        17,067     1,331,397      124,847    1,331,397
     Waycross                          1,583,507       87,000            0        13,777     2,095,982      100,777    2,095,982
     Waynesboro                        1,003,755      142,501            0             0     1,298,905      142,501    1,298,905
     Winder                              997,671      124,500   1,268, 199             0      741,405       124,500    2,009,604
Alabama:
     Albertville                         758,943      174,000            0           418     1,133,319      174,418    1,133,319
     Alexander City (g)                1,619,782      160,086            0             0     1,816,202      160,086    1,816,202
     Arab                                758,539      131,554            0             0     1,151,839      131,554    1,151,839
     Auburn                              643,193      227,000            0             0     1,389,413      227,000    1,389,413
     Bessemer                          1,828,795      327,192            0             0     2,324,744      327,192    2,324,744
     Decatur                             992,762      201,629            0             0     2,120,861      201,629    2,120,861
     Eufaula                           1,039,902      228,869            0         5,575     1,236,577      234,444    1,236,577
     Florence                          1,827,711      313,579            0         1,202     1,932,517      314,781    1,932,517
     Greenville (g)                      928,171      228,511            0             0     1,517,372      228,511    1,517,372
     Jasper (f)                        1,227,189      225,633            0             0     2,279,838      225,633    2,279,838
     Oxford (g)                        1,202,516      307,635            0          (340)    1,425,070      307,295    1,425,070
     Ozark (g)                           768,821      176,148            0             0     1,180,190      176,148    1,180,190
     Prattville                        1,640,673      319,736            0             0     2,277,107      319,736    2,277,107
     Scottsboro                        1,108,450      324,732            0             0     1,485,839      324,732    1,485,839
     Selma                             1,471,744      143,812            0        22,773     1,970,531      166,585    1,970,531
     Sylacauga (f)                         1,000      224,476            0             0     1,455,185      224,476    1,455,185
     Trussville                        1,525,774      425,438            0         1,377     2,276,204      426,815    2,276,204
     Tuscaloosa                          797,542            0            0             0     1,480,150            0    1,480,150
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                     F-34




<PAGE>

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------

Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation

As of December 31, 2000
                                                                                                   Life on
                                                                                                    Which
                                                                                                 Depreciation
                                                                                                   in Latest
                                                                                                    Income
                                                           Accumulated     Date       Date of      Statement
   Property                                     Total      Depreciation  Acquired   Construction   Computed
   ----------------------------------------  -----------   ------------  --------   ------------ ------------
<S>                                          <C>           <C>           <C>        <C>          <C>
Georgia:
     Albany                                   $2,131,989       $436,427    1994         1995         (e)
     Americus                                  2,823,274        804,826    1991         1992         (d)
     Bainbridge                                1,814,018        427,643    1994         1994         (e)
     Brunswick                                 1,891,432        355,648    1994         1995         (e)
     Calhoun                                   1,879,663        560,122    1988         1988         (d)
     Carrollton                                1,973,337        413,461    1993         1994         (e)
     Commerce                                  1,658,300        282,540    1996         1996         (e)
     Conyers                                   2,589,691        360,902    1996         1996         (e)
     Covington                                 1,530,255        478,995    1990         1990         (d)
     Dalton                                    2,826,196        218,952    1998         1998         (e)
     Douglas                                   1,323,072        296,051    1995         1995         (e)
     Dublin (f)                                1,442,456        279,699    1997         1997         (e)
     Eastman (g)                               1,571,484        552,635    1989         1989         (d)
     Fitzgerald (g)                            1,277,961        305,740    1993         1994         (e)
     Greensboro (g)                            1,679,143        607,731    1989         1990         (d)
     Hartwell                                  1,530,408        463,727    1991         1992         (d)
     Jesup                                     2,220,590        774,626    1990         1990         (d)
     Kingsland                                 1,723,984        199,916    1997         1998         (e)
     Lagrange                                  2,212,654        384,334    1995         1996         (e)
     Macon (f)                                 1,688,425        226,720    1997         1997         (e)
     Newnan                                    4,317,356              0    1998         2000         (e)
     Oakwood                                   1,630,896        269,768    1996         1997         (e)
     Perry (f)                                 1,651,329        219,390    1997         1998         (e)
     Pooler                                    3,616,945         52,943    1998         2000         (e)
     Rome                                      4,015,515        273,331    1998         1999         (e)
     Statesboro                                1,802,966        641,990    1988         1989         (d)
     Thomaston                                 2,238,682        741,149    1990         1990         (d)
     Thomasville                               1,867,357        168,637    1998         1998         (e)
     Valdosta                                  1,811,457        443,156    1994         1995         (e)
     Warner Robins                             2,438,918        363,339    1997         1997         (e)
     Washington                                1,456,244        491,526    1989         1990         (d)
     Waycross                                  2,196,759        587,167    1992         1993         (e)
     Waynesboro                                1,441,406        298,395    1995         1996         (e)
     Winder                                    2,134,104        894,124    1988          -           (d)
Alabama:
     Albertville                               1,307,737        299,941    1994         1994         (e)
     Alexander City (g)                        1,976,288        436,883    1994         1994         (e)
     Arab                                      1,283,393        280,512    1995         1995         (e)
     Auburn                                    1,616,413        234,318    1996         1997         (e)
     Bessemer                                  2,651,936        158,104    1998         1999         (e)
     Decatur                                   2,322,490        370,296    1995         1996         (e)
     Eufaula                                   1,471,021        284,164    1995         1996         (e)
     Florence                                  2,247,299        406,966    1995         1996         (e)
     Greenville (g)                            1,745,884        254,084    1996         1996         (e)
     Jasper (f)                                2,505,471        346,697    1997         1997         (e)
     Oxford (g)                                1,732,365        263,046    1996         1997         (e)
     Ozark (g)                                 1,356,338        318,285    1994         1995         (e)
     Prattville                                2,596,843        190,120    1998         1998         (e)
     Scottsboro                                1,810,571        183,914    1998         1998         (e)
     Selma                                     2,137,116        579,567    1991         1992         (d)
     Sylacauga (f)                             1,679,661        251,870    1997         1997         (e)
     Trussville                                2,703,018        260,939    1997         1998         (e)
     Tuscaloosa                                1,480,150        255,936    1996         1997         (e)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      F-35
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation

As of December 31, 2000                                                                                   Gross Amount at Which
                                                                               Cost Capitalization         Carried at Close of
                                                         Initial Cost          Subsequent to Acquisition          Period
                                                     ------------------------ --------------------------- -------------------------
                                                                 Buildings,                  Buildings,               Buildings,
                                        Mortgage                 Equipment &                 Equipment &              Equipment &
   Property                               Debt         Land      Improvement    Land         Improvement    Land      Improvement
------------------------------------  -----------    ---------  ------------- ---------     ------------- --------   --------------
<S>                                   <C>            <C>        <C>           <C>           <C>           <C>        <C>
Florida:
    Crestview                           1,967,380     471,426            0          10       3,096,228     471,436     3,096,228
    Jacksonville                        2,764,287     679,519            0       1,448       4,417,656     680,967     4,417,656
    Lake City                           1,803,653     391,456            0           0       3,096,932     391,456     3,096,932
    Lakeland                            2,330,466     618,636            0           0       3,748,316     618,636     3,748,316
    Ormond Beach                        2,270,664     497,099            0      10,859       3,750,318     507,958     3,750,318
    Palm Bay                            2,183,376     418,745            0         (11)      3,741,486     418,735     3,741,486
Illinois:
    Normal                              2,640,000   1,076,916    5,163,743           0         213,596   1,076,916     5,377,339
    Peoria                              2,280,000     817,523    4,886,124           0         245,273     817,523     5,131,397
    Springfield                         1,080,000           0    1,494,985           0         229,216           0     1,724,201
Indiana:
    Carmel                              3,644,139     684,321    3,730,497           0          40,049     684,321     3,770,546
    Elkhart                             3,220,000     637,753    5,834,950           0         199,267     637,753     6,034,217
    Evansville                          2,927,033     359,102    2,880,265           0         186,459     359,102     3,066,724
    Ft. Wayne                           2,813,047     473,564    3,062,301           0         224,852     473,564     3,287,154
    Indy Castleton                      3,035,820     584,039    5,241,877           0         196,378     584,039     5,438,254
    Indy East                           2,676,511     400,007    2,479,422           0         185,190     400,007     2,664,612
    Indy Northwest                      2,093,669     442,666    2,217,552           0         358,475     442,666     2,576,028
    Indy South                          1,222,695     180,071    1,824,161           0         126,531     180,071     1,950,692
    Indy West                           4,720,536     916,161    5,236,594           0         133,306     916,161     5,369,900
    Kokomo                              2,927,033     527,376    3,720,270      (5,843)        164,624     521,533     3,884,894
    Lafayette                           3,245,275     403,849    3,970,336           0         225,899     403,849     4,196,235
    Muncie                              2,341,627     407,065    3,392,767           0         124,587     407,065     3,517,354
    South Bend                          3,512,440     585,531    5,836,122           0         147,746     585,531     5,983,869
Iowa:
    Bettendorf                          1,223,285     974,058    3,073,596           0         173,979     974,058     3,247,575
Kentucky:
    Florence                            2,455,000     524,289    2,293,556           0         112,950     524,289     2,406,506
    Louisville East                     3,768,085     585,491    6,973,653           0         188,481     585,491     7,162,134
    Louisville South                    2,485,000     644,870    6,509,901           0         352,370     644,870     6,862,272
Mississippi:
    Grenada                             1,115,397     350,000            0       2,217       1,560,832     352,217     1,560,832
    Jackson                             2,350,000     586,831            0         602       3,746,430     587,433     3,746,430
    Meridian                            1,734,343     419,856            0       2,648       2,368,302     422,504     2,368,302
    Pearl                               2,400,000     564,932            0           0       3,743,513     564,932     3,743,513
    Tupelo                              1,522,334     427,924            0       1,360       2,265,146     429,284     2,265,146
    Vicksburg                           1,759,063     326,653            0       1,112       2,381,682     327,765     2,381,682
North Carolina:
    Asheboro                              958,781     278,841            0           0       1,501,244     278,841     1,501,244
    Clayton/Garner                      1,063,292     255,234            0           0       1,550,607     255,234     1,550,607
    Dunn                                1,138,305     202,052            0           0       1,499,416     202,052     1,499,416
    Eden                                1,063,292     197,468            0          26       1,531,671     197,494     1,531,671
    Forest City                           946,268     187,294            0       2,950       2,000,588     190,244     2,000,588
    Goldsboro                           2,200,000     397,096            0      (5,102)      3,746,590     391,994     3,746,590
    Greenville                          1,115,250     310,006            0           0       1,507,030     310,006     1,507,030
    Henderson                           1,735,314     478,688            0           0       3,756,119     478,688     3,756,119
    Hickory                             1,723,812     412,322            0           0       2,366,325     412,322     2,366,325
    Laurinburg (f)                              0     225,441            0    (181,525)      1,273,835      43,916     1,273,835
    Lenoir                              1,039,577     360,923            0       1,605       1,414,777     362,528     1,414,777
    Roanoke Rapids                      1,105,363     320,014            0      (4,812)      1,500,168     315,202     1,500,168
    Sanford (f)                           500,000     227,030            0      32,171       1,470,520     259,201     1,470,520
    Smithfield                          1,044,311     246,092            0           0       1,543,751     246,092     1,543,751
    Wilson                                954,187     237,712            0          20       1,542,424     237,732     1,542,424
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                     F-36
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation                                Life on
As of December 31, 2000                                                                 Which
                                                                                     Depreciation
                                                                                       in Latest
                                                                                        Income
                                        Accumulated        Date        Date of         Statement
   Property                 Total       Depreciation     Acquired    Construction     is Computed
----------------------   -----------   --------------  -----------  --------------  ---------------
<S>                      <C>           <C>             <C>          <C>             <C>
Florida:
    Crestview             3,567,664       168,603         1998           2000             (e)
    Jacksonville          5,098,623       243,539         1998           2000             (e)
    Lake City             3,488,389       201,752         1998           1999             (e)
    Lakeland              4,366,952        58,641         1999           2000             (e)
    Ormond Beach          4,258,276       226,185         1998           2000             (e)
    Palm Bay              4,160,221        46,328         1999           2000             (e)
Illinois:
    Normal                6,454,256       419,232         1999              -             (e)
    Peoria                5,948,920       419,184         1999              -             (e)
    Springfield           1,724,201       229,331         1999              -             (e)
Indiana:
    Carmel                4,454,867       156,754         1999              -             (e)
    Elkhart               6,671,969       423,268         1999              -             (e)
    Evansville            3,425,826       289,892         1999              -             (e)
    Ft. Wayne             3,760,718       266,399         1999              -             (e)
    Indy Castleton        6,022,293       390,461         1999              -             (e)
    Indy East             3,064,619       266,385         1999              -             (e)
    Indy Northwest        3,018,694       297,857         1999              -             (e)
    Indy South            2,130,763       218,155         1999              -             (e)
    Indy West             6,286,061       369,096         1999              -             (e)
    Kokomo                4,406,428       289,008         1999              -             (e)
    Lafayette             4,600,084       319,824         1999              -             (e)
    Muncie                3,924,419       261,855         1999              -             (e)
    South Bend            6,569,400       396,109         1999              -             (e)
Iowa:
    Bettendorf            4,221,633       313,736         1999              -             (e)
Kentucky:
    Florence              2,930,795       270,016         1999              -             (e)
    Louisville East       7,747,625       450,457         1999              -             (e)
    Louisville South      7,507,142       448,084         1999              -             (e)
Mississippi:
    Grenada               1,913,049        97,220         1998           1999             (e)
    Jackson               4,333,863        54,006         1998           2000             (e)
    Meridian              2,790,805       184,659         1998           1999             (e)
    Pearl                 4,308,445       100,954         1998           2000             (e)
    Tupelo                2,694,430       261,634         1998           1998             (e)
    Vicksburg             2,709,447       221,242         1998           1999             (e)
North Carolina:
    Asheboro              1,780,085       254,713         1997           1997             (e)
    Clayton/Garner        1,805,841       193,365         1998           1998             (e)
    Dunn                  1,701,468       227,575         1997           1998             (e)
    Eden                  1,729,165       201,987         1997           1998             (e)
    Forest City           2,190,832       375,642         1996           1997             (e)
    Goldsboro             4,138,584        34,357         1999           2000             (e)
    Greenville            1,817,036       199,000         1998           1998             (e)
    Henderson             4,234,807             0         1999           2000             (e)
    Hickory               2,778,647       214,268         1998           1998             (e)
    Laurinburg (f)        1,317,752       245,484         1996           1997             (e)
    Lenoir                1,777,305       202,768         1997           1998             (e)
    Roanoke Rapids        1,815,370       203,181         1997           1998             (e)
    Sanford (f)           1,729,720       254,735         1996           1997             (e)
    Smithfield            1,789,843       244,199         1997           1998             (e)
    Wilson                1,780,156       246,013         1996           1997             (e)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                     F-37
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 2000                                                                                     Gross Amount at Which
                                                                                    Cost Capitalization      Carried at Close of
                                                               Initial Cost      Subsequent to Acquisition         Period
                                                         ----------------------- -------------------------  -----------------------
                                                                      Buildings,               Buildings,               Buildings,
                                             Mortgage                Equipment &              Equipment &              Equipment &
   Property                                    Debt        Land      Improvement     Land     Improvement    Land      Improvement
------------------------------------------ ------------ ----------- ------------   --------  -------------  --------- -----------
<S>                                        <C>          <C>         <C>           <C>        <C>            <C>       <C>
Ohio:
    Cincy North                               2,265,163     521,588    2,220,586          0       188,091     521,588    2,408,677
    Columbus                                  3,861,138     782,254    3,905,175          0       213,873     782,254    4,119,048
    Dayton                                    2,093,669     625,511    3,388,780          0       309,593     625,511    3,698,373
South Carolina:
     Anderson                                 1,164,782     201,000            0    133,385     2,059,011     334,385    2,059,011
     Cheraw (g)                               1,713,420     168,458            0    (50,000)    1,924,832     118,458    1,924,832
     Duncan                                   1,031,464     212,246            0          0     1,495,539     212,246    1,495,539
     Easley                                     974,278     266,753            0      2,710     1,174,969     269,463    1,174,969
     Gaffney (g)                              1,961,480     135,025            0          0     1,694,224     135,025    1,694,224
     Georgetown (g)                           1,103,949     144,353            0          0     1,494,259     144,353    1,494,259
     Greenwood                                1,029,034     140,231            0     20,741     1,805,834     160,972    1,805,834
     Lancaster (g)                            1,232,086     150,592            0          0     1,156,350     150,592    1,156,350
     Orangeburg (g)                           1,287,940     165,010            0        585     1,233,002     165,595    1,233,002
     Seneca (g)                               1,251,799     204,385            0          0     1,256,277     204,385    1,256,277
     Simpsonville                             1,035,042     229,205            0          0     1,321,104     229,205    1,321,104
     Spartanburg                              1,033,740     247,838            0          0     1,469,999     247,838    1,469,999
     Union (g)                                  694,896     178,006            0        746     1,301,051     178,752    1,301,051
Tennessee:                                                                     0
     Cleveland                                1,753,615     384,688            0      4,343     2,261,375     389,031    2,261,375
     Columbia                                 1,805,814     483,568            0      6,967     3,084,513     490,535    3,084,513
     Decherd (f)                                      0     254,501            0   (124,809)    1,335,526     129,692    1,335,526
     Gallatin                                 1,641,327     405,738            0          0     2,282,310     405,738    2,282,310
     Greeneville                              1,743,274     406,052            0   (274,709)    3,085,130     131,343    3,085,130
     Jackson                                  2,210,226     467,741            0        141     3,759,214     467,882    3,759,214
     Johnson City                             1,827,716     405,939            0         89     2,166,988     406,028    2,166,988
     Kingsport                                1,715,552     425,481            0          0     3,083,478     425,481    3,083,478
     Knoxville                                2,105,060     572,026    3,347,959          0       170,528     572,026    3,518,487
     Oakridge                                 2,832,271     451,037            0          8     4,418,412     451,045    4,418,412
     Tullahoma (f)                                    0     303,536            0          0     1,326,259     303,536    1,326,259
Virginia:
     Harrisonburg                               144,890     435,000            0       (700)    3,743,961     434,300    3,743,961
     Martinsville                             1,621,211     411,496            0      3,100     3,083,482     414,596    3,083,482
Construction in progress:
     Alcoa, TN                                  799,966     427,803            0          0     1,789,406     427,803    1,789,406
     Lafayette, LA                               79,682     433,291            0    204,546     1,801,123     637,837    1,801,123
     Richmond, KY                                63,405     607,095            0      2,858       582,617     609,953      582,617
     Wilmington, NC                             169,009     685,078            0        (87)    2,111,473     684,991    2,111,473
     Shreveport, LA                             268,882     531,041            0      8,409       995,407     539,450      995,407
Billboards                                      555,009           0    2,381,012          0       439,458           0    2,820,470
Property and equipment held for sale          4,868,285   2,869,482    9,112,756   (297,443)   (3,854,097)  2,572,039    5,258,659
                                           ------------ ----------- ------------ ----------  ------------ ----------- ------------
   Totals                                  $207,145,362 $47,912,951 $105,447,139  ($149,714) $219,864,133 $47,763,237 $325,311,272
                                           ============ =========== ============ ==========  ============ =========== ============
</TABLE>

                                     F-38
<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                                                  Life on
                                                                                                                   Which
                                                                                                                Depreciation
                                                                                                                 in Latest
                                                                                                                   Income
                                                                   Accumulated        Date          Date of      Statement
   Property                                          Total         Depreciation     Acquired     Construction   is Computed
----------------------------------------        --------------    -------------     --------    -------------   ------------
<S>                                             <C>               <C>               <C>         <C>             <C>
Ohio:
    Cincy North                                      2,930,265          277,032       1999             -            (e)
    Columbus                                         4,901,302          333,142       1999             -            (e)
    Dayton                                           4,323,884          342,645       1999             -            (e)
South Carolina:
     Anderson                                        2,393,396          528,067       1993          1993            (e)
     Cheraw (g)                                      2,043,290          331,976       1995          1995            (e)
     Duncan                                          1,707,784          238,413       1997          1998            (e)
     Easley                                          1,444,433          287,142       1994          1995            (e)
     Gaffney (g)                                     1,829,249          380,879       1995          1995            (e)
     Georgetown (g)                                  1,638,612          282,202       1996          1996            (e)
     Greenwood                                       1,966,806          388,448       1994          1995            (e)
     Lancaster (g)                                   1,306,942          276,857       1994          1995            (e)
     Orangeburg (g)                                  1,398,597          292,137       1995          1995            (e)
     Seneca (g)                                      1,460,662          252,196       1996          1996            (e)
     Simpsonville                                    1,550,309          271,395       1996          1996            (e)
     Spartanburg                                     1,717,837          233,237       1997          1998            (e)
     Union (g)                                       1,479,802          254,090       1996          1997            (e)
Tennessee:
     Cleveland                                       2,650,406          224,247       1997          1998            (e)
     Columbia                                        3,575,048           19,263       1998          2000            (e)
     Decherd (f)                                     1,465,218          246,344       1996          1997            (e)
     Gallatin                                        2,688,049          177,881       1998          1999            (e)
     Greeneville                                     3,216,473          186,906       1998          2000            (e)
     Jackson                                         4,227,096           71,009       1998          2000            (e)
     Johnson City                                    2,573,016          349,712       1997          1997            (e)
     Kingsport                                       3,508,959           38,187       1999          2000            (e)
     Knoxville                                       4,090,513          319,897       1999             -            (e)
     Oakridge                                        4,869,457          302,334       1998          1999            (e)
     Tullahoma (f)                                   1,629,796          233,895       1996          1997            (e)
Virginia:
     Harrisonburg                                    4,178,261                0       1998          2000            (e)
     Martinsville                                    3,498,077           19,238       1998          2000            (e)
Construction in progress:
     Alcoa, TN                                       2,217,209                0          -             -             -
     Lafayette, LA                                   2,438,960                0          -             -             -
     Richmond, KY                                    1,192,570                0          -             -             -
     Wilmington, NC                                  2,796,464                0          -             -             -
     Shreveport, LA                                  1,534,857                0          -             -             -
Billboards                                           2,820,470          457,467       1999          2000            (e)
Property and equipment held for sale                 7,830,698          659,010          -             -            (e)
                                                  ------------      -----------
   Totals                                         $373,074,509      $38,983,651
                                                  ============      ===========
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-39
<PAGE>

                    Jameson Inns, Inc. Notes to Schedule III
                    ----------------------------------------



<TABLE>
<CAPTION>
                                                            2000                    1999                    1998
                                                        ------------            ------------            ------------
<S>                                                     <C>                     <C>                     <C>
(a)   Reconciliation of real estate
     Balance at beginning of year.........              $321,134,052            $168,880,042            $117,515,375
     Additions during year:
               Improvements...............                53,873,140             157,106,500              55,844,810
               Deletions..................                (1,932,683)             (4,852,490)             (4,480,143)
                                                        ------------            ------------            ------------
     Balance at end of year...............              $373,074,509            $321,134,052            $168,880,042
                                                        ============            ============            ============

(b)   Reconciliation of accumulated
      depreciation
    Balance at beginning of year..........              $ 24,551,080            $ 16,754,843            $ 12,584,189
               Depreciation for the year..                14,619,522              10,396,468               5,636,079
               Retirements................                  (186,951)             (2,600,231)             (1,465,425)
                                                        ------------            ------------            ------------
    Balance at end of year................              $ 38,983,651            $ 24,551,080            $ 16,754,843
                                                        ============            ============            ============
</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)  This Inn is one of 9 Inns securing the Company's $8.92 million line of
     credit.

(g)  This Inn is one of 14 Inns securing the Company's $17.2 million note
     payable.  Amount of debt listed as outstanding is an allocation.


                                     F-40

<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, 2000 and 1999,  and for each of the three years in the period
ended December 31, 2000, and have issued our report thereon dated February 8,
2001 (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 8, 2001


                                     F-41


<PAGE>

                           Jameson Hospitality, LLC

                       Consolidated Financial Statements


                    Years ended December 31, 2000 and 1999


<TABLE>
<CAPTION>
                                   Contents

<S>                                                                      <C>
Report of Independent Auditors.........................................   F-43

Consolidated Financial Statements

Consolidated Balance Sheets............................................   F-44
Consolidated Statements of Operations..................................   F-45
Consolidated Statements of Members' Capital............................   F-46
Consolidated Statements of Cash Flows..................................   F-47
Notes to Consolidated Financial Statements.............................   F-49
</TABLE>

                                      F-42
<PAGE>

                        Report of Independent Auditors

The Members
Jameson Hospitality, LLC

We have audited the accompanying consolidated balance sheets of Jameson
Hospitality, LLC as of December 31, 2000 and 1999, and the related consolidated
statements of operations, members' capital and cash flows for each of the three
years in the period ended December 31, 2000. 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
audits 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
Hospitality, LLC at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.



Atlanta, Georgia
March 8, 2001

                                      F-43
<PAGE>

                           Jameson Hospitality, LLC

                          Consolidated Balance Sheets



<TABLE>
<CAPTION>
                                                                            December 31
                                                                    2000                 1999
                                                              ------------------------------------
<S>                                                            <C>                 <C>
Assets
Current assets:
 Cash                                                           $  1,733,272        $    543,282
 Marketable securities                                             1,113,795           1,013,785
 Accounts receivable, net of allowance of $85,324
  ($141,500 in 1999)                                               2,921,771           2,630,305
 Accounts receivable from affiliates                               7,972,729           7,231,418
 Predevelopment costs                                                103,773             288,785
 Prepaid expenses and other assets                                   261,413             363,668
 Inventory                                                         1,451,363           1,256,015
                                                              ----------------------------------
                                                                  15,558,116          13,327,258

Property and equipment, net                                          640,305             833,585
Leasehold improvements, net                                           71,034              89,828
Intangibles, net                                                     253,493             267,818
                                                              ----------------------------------
                                                                $ 16,522,948         $14,518,489
                                                              ==================================

Liabilities and Members' capital
Current liabilities:
 Subcontractors payable, including retainage of
  $3,835,055 ($1,195,267 in 1999)                               $  4,054,135         $ 3,040,499
 Accounts payable                                                    593,350           1,293,239
 Lease expense payable                                             5,782,118           6,941,315
 Notes payable, current portion                                        9,916               9,010
 Accrued payroll                                                   1,176,161             465,128
 Other accrued liabilities                                         3,709,803           1,725,497
                                                              ----------------------------------
                                                                  15,325,483          13,474,688

Deferred gain on sale of asset                                       670,502             883,394
Notes payable, long-term portion                                     306,393             315,638
                                                              ----------------------------------
Total liabilities                                                 16,302,378          14,673,720
Members' capital                                                     220,570            (155,231)
                                                              ----------------------------------
                                                                $ 16,522,948         $14,518,489
                                                              ==================================
</TABLE>

See accompanying notes.

                                      F-44
<PAGE>

                            Jameson Hospitality, LLC

                     Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                           Year ended December 31
                                                  2000             1999              1998
                                               ------------------------------------------------
<S>                                           <C>               <C>              <C>
Revenues:
 Room rental revenues                          $ 93,351,545     $ 74,245,709     $  37,982,374
 Telephone revenues                               1,572,681        1,450,448           757,105
 Other inn-related sales                          1,171,575          730,866            47,220
 Contract revenues                               48,298,347       30,413,710        40,990,447
 Billboard rentals                                        -          105,877            91,076
 Overhead reimbursement income                    1,257,867                -                 -
 Other income                                             -           36,772             6,458
 Gain on sale of assets, net                        134,471          240,545                 -
                                               -----------------------------------------------
                                                145,786,486      107,223,927        79,874,680

Expenses:
 Lease expense                                   43,099,792       34,612,795        18,229,748
 Cost of contract revenues                       41,599,541       25,342,725        35,518,450
 Room expenses                                   24,407,376       19,132,033         8,888,441
 Utilities                                        5,520,621        4,029,937         3,346,327
 General and administrative                      17,842,765        8,292,165         4,085,566
 Inn manager salaries                             5,570,735        5,039,406         2,510,644
 Maintenance                                      4,063,860        3,303,181         1,366,510
 Advertising                                      3,005,726        2,706,089         2,195,759
 Management fee to affiliate                              -        4,202,961         2,655,334
 Prospective site expense                                 -          301,401           614,448
 Interest (income) expense, net                    (233,762)          17,922           166,416
 Depreciation and amortization                      316,806          109,316           456,213
                                               -----------------------------------------------
Total expenses                                  145,193,460      107,089,931        80,033,856
                                               -----------------------------------------------
Net income (loss)                              $    593,026     $    133,996     $    (159,176)
                                               ===============================================
</TABLE>


See accompanying notes.

                                      F-45
<PAGE>

                           Jameson Hospitality, LLC

                  Consolidated Statements of Members' Capital


<TABLE>
<CAPTION>
                                                                Members'          Comprehensive
                                                                 Capital          Income (Loss)
                                                            ----------------    -----------------
<S>                                                         <C>                 <C>
Balance at December 31, 1997                                $     1,929,940
 Capital contributions                                              600,000
 Distributions                                                   (2,234,718)
 Net loss                                                          (159,176)    $     (159,176)
 Unrealized loss on marketable securities                           (66,719)           (66,719)
                                                                                --------------
 Comprehensive loss                                                             $     (225,895)
                                                            ---------------     ==============

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
                                                            ===============
</TABLE>


See accompanying notes.

                                      F-46
<PAGE>

                            Jameson Hospitality, LLC

                     Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                                         2000               1999               1998
                                                    ----------------------------------------------------
<S>                                                   <C>              <C>               <C>
Operating activities
Net income (loss)                                     $  593,026       $   133,996       $  (159,176)
Adjustments to reconcile net income (loss)
 to cash provided by  (used in) operating
 activities:
   Depreciation and amortization                         316,806           109,316           456,213
   Bad debt expense                                            -           264,684            72,409
   Gain on sale of assets                               (134,471)         (240,545)                -
   Changes in assets and liabilities
    increasing (decreasing) cash:
     Accounts receivable                                (291,466)         (775,833)         (352,983)
     Accounts receivable from affiliates                (741,311)       (5,220,190)          (35,461)
     Predevelopment costs                                185,012           168,428          (307,853)
     Prepaid expenses and other assets                   102,255             3,347           (75,545)
     Inventory                                          (195,348)         (108,876)         (147,200)
     Subcontractors payable                            1,013,636           (65,667)         (130,238)
     Accounts payable                                   (699,889)         (471,869)          913,054
     Lease expense payable                            (1,159,197)        4,651,562           832,082
     Accrued payroll and other                         2,695,339           787,556           179,587
                                                    ------------------------------------------------
Net cash provided by (used in) operating
 activities                                            1,684,392          (764,091)        1,244,889

Investing activities
Proceeds from sale of assets                                   -           592,707                 -
Purchase of property and equipment                       (93,558)         (103,819)       (1,476,655)
Purchase of Signature Inn assets, net of
 cash acquired                                                 -            17,500                 -
Dividends on marketable securities                             -                 -          (266,248)
                                                    ------------------------------------------------
Net cash (used in) provided by investing
 activities                                              (93,558)          506,388        (1,742,903)
</TABLE>

                                     F-47
<PAGE>

                            Jameson Hospitality, LLC

               Consolidated Statements of Cash Flows (continued)


<TABLE>
<CAPTION>
                                                                   Year ended December 31

                                                              2000               1999                  1998
                                                      -----------------------------------------------------------
<S>                                                     <C>                 <C>                  <C>
Financing activities
Contributions from members                               $         -         $   150,095          $    600,000
Distributions to members                                    (392,505)           (243,479)           (2,234,718)
Proceeds from notes payable                                        -                   -             1,104,415
Payments on notes payable                                     (8,339)           (183,210)             (212,590)
                                                      --------------------------------------------------------
Net cash used in financing activities                       (400,844)           (276,594)             (742,893)

Net change in cash                                         1,189,990            (534,297)           (1,240,907)
Cash at beginning of year                                    543,282           1,077,579             2,318,486
                                                      --------------------------------------------------------
Cash at end of year                                      $ 1,733,272         $   543,282          $  1,077,579
                                                      ========================================================

Supplemental cash flow information
Interest paid during the year                            $ 1,718,875         $ 1,576,626          $  1,326,782
                                                      ========================================================
Non-cash activity
Unrealized loss on marketable securities                 $   175,280         $  (421,595)         $    (66,719)
                                                      ========================================================
Net non-cash items related to merger and
 distribution activities                                 $         -         $   156,425          $          -
                                                      ========================================================
</TABLE>


See accompanying notes.

                                      F-48
<PAGE>

                           Jameson Hospitality, LLC

                  Notes to Consolidated Financial Statements

                               December 31, 2000


1. Business and Basis of Financial Statements

Jameson Hospitality, LLC (the "Company") leases, operates, and develops 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.

Jameson Development Company, LLC was formed on March 22, 1996 and then changed
its name to Jameson Hospitality, LLC (the "Company") on May 7, 1998. Effective
March 31, 1998, three related companies merged into Jameson Development Company,
LLC: Jameson Operating Company, LLC, Jameson Outdoor Advertising Company II, LLC
and Jameson Aviation Company, LLC. Since these three companies were all wholly-
owned by Thomas W. Kitchin and his spouse, the merger was accounted for similar
to a pooling of interests. In November 2000, the Jameson Development Company
division of Jameson Hospitality, LLC changed its name to Kitchin Construction
Company, a division of Jameson Hospitality, LLC.

On January 1, 1999, the Company distributed the ownership interest of Jameson
Aviation Company, LLC to its owners. The $200,756 excess of the liabilities over
the assets of Jameson Aviation Company, LLC were recorded as a non-cash
distribution.

On April 2, 1999, the Company sold the outdoor advertising assets and certain
operations of the Company to the REIT for consideration totaling approximately
$2.4 million. These assets consisted 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. These billboards were
leased to the Company and continue to be used for similar types of advertising.

On May 7, 1999, the REIT merged with Signature Inns, Inc. As a part of this
transaction, the Company acquired all of the assets and assumed the liabilities
related to operation of the Signature Inn hotel properties, for total cash
consideration of $250,000. The Signature Inn employees became employees of the
Company and the Company entered into a lease with the REIT and began operating
these hotels effective May 7, 1999.

                                      F-49
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)


1. Business and Basis of Financial Statements (continued)

Prior to December 31, 1999, Kitchin Investments, Inc. was wholly-owned by Thomas
W. Kitchin and employed all of the individuals who provide services to both the
Company and the REIT. This company also provided the general office overhead
support for these other companies. Effective December 31, 1999, Kitchin
Investments, Inc. merged into the Company. Due to the common ownership of the
Company and Kitchin Investments, Inc., the merger was accounted for similar to a
pooling of interests.

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

   .  The Hotel division leases the Inns from the REIT (see Note 3) and operates
      the Inns in all respects including staffing, advertising, housekeeping,
      and routine maintenance. At the present time, the Company is the exclusive
      lessee of Jameson Inns and Signature Inns. At December 31, 2000 and 1999,
      the Company leased 130 Inns (8,350 rooms) and 114 Inns (7,300 rooms),
      respectively.

   .  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. At the present time, the Company is the exclusive
      developer/contractor for the REIT.

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.

                                      F-50
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)



2. Summary of Significant Accounting Policies

Use of Estimates

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

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. Fair value is based on the closing
price of the securities on the last day of trading in the year.

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.

                                      F-51
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)



2. Summary of Significant Accounting Policies (continued)

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

                                      F-52
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)



2. Summary of Significant Accounting Policies (continued)

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 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 $18,369 and
$4,044 as of December 31, 2000 and 1999, respectively.

Income Taxes

Jameson 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

All forms of advertising in 2000 were expensed as incurred.  During 1999 and
1998, the Company contracted with an advertising agency for the production and
broadcast or printing of various radio, newspaper and television ads for the
Inns. The Company expenses advertising upon first showing. This contract was not
renewed in 2000.

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.

                                      F-53
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)



3. Leases (continued)

The Jameson and Signature leases, which expire December 31, 2010 and 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 rentable room in the Inns at the
beginning of the relevant month.

Percentage Rent, which is payable quarterly, is calculated as a percentage in
excess of Base Rent of the total amount of room rental and other miscellaneous
revenues realized by the Company over the relevant period. For Jameson Inns, the
percentage is 39% of such revenues up to $21.91 per day per room in 2000 plus
65% of all additional average daily room rental revenues. For Signature Inns,
the percentage is 37% of such revenues up to $36.76 per day per room in 2000
plus 65% of the next $10.00 of average daily per room rental revenues; plus 70%
of all additional average daily room rental revenues.

Total rent for the Jameson Inns for any calendar year may not exceed 47% of
total room rental revenues Jameson Inns for that year. The $21.91 and $36.76 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, 2001 was adjusted to $22.65 and
$38.00 for Jameson Inns and Signature Inns, respectively.

Base rent totaled $28,900,248, $20,998,052 and $10,501,920 in 2000, 1999 and
1998, respectively, and assuming the same number of rooms in operation at
December 31, 2000, 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.

                                      F-54
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)


3. Leases (continued)

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

4. Property and Equipment

Property and equipment consists of the following at December 31:


                                                 2000            1999
                                          ---------------------------

      Property and equipment              $ 1,054,495       $ 974,989
      Accumulated depreciation               (414,190)       (141,404)
                                          ---------------------------
                                          $   640,305       $ 833,585
                                          ===========================


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, accordingly, $212,892 and $279,704 were
recognized in the years ended December 31, 2000 and 1999, respectively.

                                      F-55
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)


5. Contracts

Contracts consist of the following at December 31:



                                                  2000                1999
                                              ----------------------------------

Costs incurred on contracts                     $41,599,541         $25,342,725
Estimated earnings                                6,698,806           5,070,985
                                              ---------------------------------
Contract revenues earned                         48,298,347          30,413,710
Less: billings                                   48,298,347          30,413,710
                                              ---------------------------------
Costs and estimated earnings in excess of
 billings on contracts in progress              $         -         $         -
                                              =================================


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 decreased net income for the
year ended December 31, 2000 and 1999 by approximately $576,000 and $789,000,
respectively.

6. Notes Payable

Notes payable consist of the following at December 31:


                                                           2000        1999
                                                      --------------------------
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%
  (10.75% at December 2000). This loan is guaranteed
  by the CEO and President of the Company.
                                                          $287,033    $293,317

                                      F-56
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)



6. Notes Payable (continued)



                                                           2000           1999
                                                     --------------------------
Notes payable, maturing, July 2009.  Due in
 monthly installments of $160 and $265 of
 principal and interest with remaining unpaid
 balance payable at maturity.  Interest accrues
 at a 10% per annum.                                        29,276       31,331
                                                     --------------------------
Total                                                      316,309      324,648
Less current portion                                         9,916        9,010
                                                     --------------------------
                                                           306,393     $315,638
                                                     ==========================


At December 31, 2000 and 1999, 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, 2000 and
thereafter:



            2001                                $  9,916
            2002                                  10,911
            2003                                  12,009
            2004                                  13,216
            2005                                  14,766
            Thereafter                           255,491
                                                --------
                                                $316,309
                                                ========


7. Related Party Transactions

At December 31, 2000 the Company had executed or expected to execute
construction contracts with the REIT for new Inns or expansions totaling $20.6
million, of which $13.3 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.

                                      F-57
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)


Overhead charged to the REIT was $961,821 in 2000 pursuant to the Cost
Reimbursement Agreement and is reflected as overhead reimbursement income in the
accompanying statements of operations.

Prior to December 31, 1999, the Company shared office space and management with
Kitchin Investments, Inc. The Company had a Cost Reimbursement Agreement with
Kitchin Investments, Inc. whereby the Company agreed to reimburse Kitchin
Investments, Inc. 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 Company in
1999 and 1998 was $4,202,961 and $2,655,234 respectively, pursuant to the Cost
Reimbursement Agreement and such amounts are reflected as management fee to
affiliate in the accompanying statements of operations through December 31,
1999. On December 31, 1999, Kitchin Investments, Inc. merged with the Company
and the Cost Reimbursement Agreement was assumed by the Company effective
December 31, 1999.

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, 2000, 1999 or 1998.

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 2000, 1999, and 1998, which is included in cost of revenues
earned, totaled approximately $1,686,879, $1,596,925 and $1,125,935,
respectively.  Interest paid includes amounts paid on behalf of the REIT.

                                      F-58
<PAGE>

                           Jameson Hospitality, LLC

            Notes to Consolidated Financial Statements (continued)


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,
         2001                                         $  656,381
         2002                                            667,915
         2003                                            684,114
         2004                                            699,504
         2005                                            525,928
         Thereafter                                      571,583
                                                      ----------
                                                      $3,805,425
                                                      ==========

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,
         2001                                         $550,008
         2002                                           82,504
         2003                                           14,082
                                                      --------
                                                      $646,594
                                                      ========



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-59
<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 27, 2001.

                              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:

           NAME                             TITLE                      DATE
           ----                             -----                      ----

/s/ Thomas W. Kitchin
--------------------------   Chairman of the Board of             March 27, 2001
Thomas W. Kitchin            Directors, Chief Executive Officer
                             (principal executive officer)

/s/ Craig R. Kitchin
--------------------------   President and Chief Financial        March 27, 2001
Craig R. Kitchin             Officer (principal financial
                             officer)

/s/ Martin D. Brew
--------------------------   Treasurer and Corporate Controller   March 27, 2001
Martin D. Brew               (principal accounting officer)

/s/ Robert D. Hisrich
--------------------------   Director                             March 27, 2001
Robert D. Hisrich

/s/ Michael E. Lawrence
--------------------------   Director                             March 27, 2001
Michael E. Lawrence

/s/ Thomas J. O'Haren
--------------------------   Director                             March 27, 2001
Thomas J. O'Haren


<PAGE>

                                EXHIBIT INDEX


 1.1 --  Sales Agency Agreement by and among Jameson Inns,
         Inc., RGC Brinson Patrick, a division of Ramius
         Securities, LLC, and 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 --  Articles of Incorporation of the Registrant
         incorporated by reference to Exhibit 3.1.1 to the
         Registration Statement filed on Form S-11, File No.
         33-71160

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

 3.3 --  Articles of Amendment to the Articles of
         Incorporation of the Registrant setting forth the
         Designation of Preferences, Rights, Privileges and
         Restrictions of the 9.25% Series A Cumulative
         Preferred Stock the Registrant incorporated by
         reference to Exhibit 2.1 to the Registrant's Form 10-
         K/A1 (Amendment No. 1 to the Registrant's Annual
         Report on Form 10-K) for the year ended December 31,
         1993

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

 3.5 --  Articles of Amendment to the Articles of
         Incorporation of the Registrant amending the
         Designation of Preferences, Rights, Privileges and
         Restrictions of the 9.25% Series A Cumulative
         Preferred Stock of the Registrant incorporated by
         reference to Exhibit 3.6 to the Registrant's Annual
         Report on Form 10-K for the year ended December 31,
         1994

 3.6 --  Articles of Amendment to the Articles of
         Incorporation of the Registrant amending the
         Designation of Preferences, Rights, Privileges and
         Restrictions of the 9.25% Series A Cumulative
         Preferred Stock incorporated by reference to Exhibit
         3.5 to the Registration Statement on Form S-4, File
         No. 333-74149

 3.7 --  Articles of Amendment to the Articles of
         Incorporation of the Registrant setting forth the
         Designation of Preferences, Rights, Privileges and
         Restrictions of the $1.70 Series S Cumulative
         Convertible Preferred Stock incorporated by reference
         to Exhibit 3.7 of Post-Effective Amendment No. 1 to
         the Registration Statement on Form S-3, File No. 333-
         20143

<PAGE>

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

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

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

 3.11 -- Amendment No. 3 to the Bylaws of Registrant
         incorporated by reference to Exhibit 4.8 to the
         Registration Statement on Form S-3, File No. 333-
         55916

 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 10.1 to the
         Annual Report filed on Form 10-K for the year ended
         December 31, 1993

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

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

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

10.5 --  Amendment No. 4 to Master Lease Agreement (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

<PAGE>

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 --  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

10.10 -- 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

10.11 -- Cost Reimbursement Agreement between Jameson Inns., Inc. and
         Jameson 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

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

10.13 -- 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

10.14 -- 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

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

10.16 -- 1994 Amendment to Jameson 1993 Stock Incentive Plan
         incorporated by reference to Exhibit 10.11 to the Annual
         Report filed on Form 10-K for the year ended December 31,
         1995

<PAGE>

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

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

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

10.20 -- 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

10.21 -- Indemnification and Hold Harmless Agreement between Jameson
         Inns, Inc. and Jameson 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

10.22 -- Indemnification and Hold Harmless Agreement between Jameson
         Inns, Inc. and Jameson 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

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

10.24 -- 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

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

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

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

<PAGE>

10.28 -- 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

10.29 -- 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

10.30 -- Asset Purchase Agreement by and among Jameson Outdoor
         Advertising Company, Jameson Inns, Inc. and Jameson
         Hospitality, LLC dated as of January 4, 1999 incorporated by
         reference to Exhibit 10.30 to the Annual Report filed on
         Form 10-K for the year ended December 31, 1999

10.31 -- 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

10.32 -- Loan Agreement between the City of Elkhart, Indiana and
         Jameson Inns, Inc. dated as of December 1, 1999, relating to
         the issuance of $3,305,000 of Adjustable Rate Economic
         Development Revenue Refunding Bonds, Series 1999; Trust
         Indenture between City of Elkhart, Indiana and Firstar Bank,
         N.A. as Trustee, dated as of December 1, 1999; Escrow
         Deposit Agreement dated December 22, 1999, by and among
         Jameson Inns, Inc., the City of Elkhart, Indiana, Bank One
         Trust Company, NA as Escrow Trustee and Bank One Trust
         Company, NA as Prior Trustee; Specimen Irrevocable Letter of
         Credit dated December 22, 1999 for the benefit of
         bondholders for the account of Jameson Inns, Inc.;
         Reimbursement Agreement between Jameson Inns, Inc. and
         Firstar Bank, N.A. dated December 22, 1999; Mortgage,
         Assignment of Rents and Security Agreement from Jameson
         Inns, Inc. to Firstar Bank, N.A. dated as of December 22,
         1999; Assignment of Leases and Rents from Jameson Inns, Inc.
         to Firstar Bank, N.A. dated as of December 22, 1999;
         Assignment and Subordination of Master Lease by Jameson
         Inns, Inc. and 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

<PAGE>

10.33 -- Schedule of documents substantially similar to Exhibit 10.32
         incorporated by reference to Exhibit 10.33 to the Annual
         Report filed on Form 10-K for the year ended December 31,
         1999

10.34 -- Employment contract with Thomas W. Kitchin dated July 27,
         2000, incorporated by reference to Exhibit 10.1 to the
         Report for the quarter ended September 30, 2000

10.35 -- Employment contract with Craig R. Kitchin dated July 27,
         2000, incorporated by reference to Exhibit 10.2 to the
         Report for the quarter ended September 30, 2000

10.36 -- Employment contract with William D. Walker dated July 27,
         2000, incorporated by reference to Exhibit 10.3 to the
         Report for the quarter ended September 30, 2000

10.37 -- Employment contract with Steven A. Curlee dated July 27,
         2000, incorporated by reference to Exhibit 10.4 to the
         Report for the quarter ended September 30, 2000

10.38 -- 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

10.39 -- 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

10.40 -- Loan Agreement dated December 27, 2000, between Jameson
         Properties, LLC and First Bank, Peoria, Illinois for
         Signature Inn, Normal, Illinois; Mortgage and Security
         Agreement; Assignment of Leases and Rents; Subordination
         Agreement; Tenant Estoppel Agreement; Indemnity Agreement;
         and Promissory Note A for $6,000,000; Promissory Note B for
         $5,000,000

10.41 -- Schedule of documents substantially similar to Exhibit 10.40

10.42 -- 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

10.43 -- 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

10.44 -- Schedule of documents substantially similar to Exhibit 10.43

21.1 --  Subsidiaries of the Registrant

23.1 --  Consent of Ernst & Young LLP