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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

for the transition from                  to                 

Commission File Number: 0-23256

JAMESON INNS, INC.

(Exact name of Registrant as specified in its Articles)

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

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

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

Common Stock, par value $0.10 per share

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

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

(Title of Each Class)

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

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

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

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

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

FORM 10-K

JAMESON INNS, INC.

ANNUAL REPORT

YEAR ENDED DECEMBER 31, 2002

Table of Contents

JAMESON INNS, INC.

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Forward-Looking Statements

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

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

PART I

ITEM 1. BUSINESS

General

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

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

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

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

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

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

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

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

Material Developments in 2002

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

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

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

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

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

Risk Factors

Risks Which are Specific to Jameson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks of Hotel Investments Generally

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

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

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

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

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

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

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

Risks of Real Estate Investments Generally

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

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

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

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

Tax Risks

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

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

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

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

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

The Master Leases

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

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

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

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

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

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

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

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

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

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

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

100% of base rent paid for the same period.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Plans for 2003

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

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

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

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

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

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

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

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

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

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

Regulations

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

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

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

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

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

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

Employees

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Policies and Objectives with Respect to Certain Activities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Taxation of Jameson

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

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

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

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

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

Requirements for Qualification

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

Income Tests

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

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

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

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

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

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

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

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

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

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

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

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

Asset Tests

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

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

Annual Distribution Requirements

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

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

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

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

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

Failure to Qualify

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

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Taxation of Shareholders

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

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

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

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

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

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

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

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

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

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

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

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

Other Tax Consequences

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

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

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ITEM 2. PROPERTIES.

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

Jameson Inns

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29

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Signature Inns

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ITEM 3. LEGAL PROCEEDINGS.

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

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

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

PART II

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

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

Comparative Per Share Market Price and Dividend Information

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

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

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ITEM 6. SELECTED FINANCIAL DATA

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

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

JAMESON INNS, INC.

SELECTED FINANCIAL INFORMATION

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

33

34