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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, 2004

or

For the transition period from                          to                     

Commission File Number: 0-23256

JAMESON INNS, INC.

(Exact name of Registrant as specified in its charter)

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

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

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

Aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant as of June 30, 2004: $24,273,562

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 24, 2005: 57,053,037.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual meeting of stockholders to be held June 21, 2005 are incorporated by reference into Part III.

Table of Contents

FORM 10-K

JAMESON INNS, INC.

ANNUAL REPORT

YEAR ENDED DECEMBER 31, 2004

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JAMESON INNS, INC.

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Forward-Looking Statements

This report, including the documents incorporated in this report by reference, contains certain forward-looking statements. These include statements about the effects of the relinquishment of our status as a real estate investment trust and our acquisition of Kitchin Hospitality, LLC (“Kitchin Hospitality”) on January 2, 2004, changes in interest rates, our expansion plans, acquisition or leasing of additional land parcels, construction of new inns and expansion of existing inns, disposition of land parcels and hotels, access to debt financing and capital, future corporate strategies and direction, effects and circumstances relating to terrorist acts similar in nature to those which occurred on September 11, 2001, on-going military actions and the anticipated negative impact on travel, 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

Overview

We are an owner and operator of economy and mid-scale hotels in the southeastern and midwestern United States. As of December 31, 2004, we owned 90 Jameson Inns and franchised an additional 12 Jameson Inns in the southeastern United States, totaling 5,604 rooms. At the same date, we also owned 23 Signature Inns in the midwestern United States totaling 2,620 rooms. We also manage one of our franchised hotels.

We were founded in 1987 by Thomas W. Kitchin, our chairman and chief executive officer, and originally began operations as a Delaware corporation. In 1993, we became a Georgia corporation. We completed our IPO in 1994. At the time of our IPO, we elected to qualify as a real estate investment trust, commonly known as a REIT, for federal income tax purposes. In order to comply with prohibitions on REITs’ direct operation of their hotel properties, we leased our owned Inns to Kitchin Hospitality. Under those lease arrangements, Kitchin Hospitality was responsible for operating our properties and paid us a base rent plus a variable rent based upon the revenues per room received by Kitchin Hospitality.

On January 2, 2004, we acquired Kitchin Hospitality from Thomas W. Kitchin, his spouse, and the six Kitchin Children’s Trusts (the beneficiaries of which are Mr. Kitchin’s six children, including Craig R. Kitchin, our president, chief financial officer and a director, and of which Thomas W. Kitchin serves as trustee). Mr. Kitchin, his spouse and the trusts received 2,153,366 shares of our common stock and cash in the amount of $1.3 million. Kitchin Hospitality is now our wholly owned subsidiary.

Effective January 1, 2004, we relinquished our status as a REIT for federal income tax purposes and became a taxable corporation. Since we are no longer subject to the restrictions under the Internal Revenue Code imposed upon REITs, we are now able to operate our Inns and receive the full financial benefits from those operations, as well as engage in other related activities such as franchising and property management that allow us to capitalize upon our strong brand name.

In connection with our conversion to a taxable corporation, we do not intend to pay a dividend on our common stock for the foreseeable future and instead intend to reinvest our available cash flow into our business. In addition to eliminating the conflicts of interest that were inherent in our lease arrangements with Kitchin Hospitality, we believe that our restructuring simplifies our business model and positions us to capitalize on the increased economic activity that we expect in our markets.

On July 26, 2004, we completed a public offering of 43,000,000 shares of our common stock at a price of $1.92 per share, raising gross proceeds of approximately $82.6 million and net proceeds of approximately $77.0 million. On August 25, 2004 we used the proceeds of that offering to redeem all shares of both series of preferred stock at their stated par value plus accrued dividends through the date of redemption.

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Business Strategy

In connection with our corporate restructuring completed in January 2004 and the redemption of our preferred stock in August 2004, we have revised our business strategy to enhance the expansion and aggressive marketing of the Jameson Inn brand. Our primary means of expanding the Jameson Inn brand will be through the conversion of our Signature Inns to Jameson Inns. By redeeming our preferred stock, we have significantly increased our available cash flow. As we are no longer a REIT, we are not required to distribute substantially all of our income to our shareholders.

We believe that our investment in, and dedication to, the following initiatives will expand our brand presence and generate attractive increases in revenue per available room, or “RevPAR.” Our strategy to achieve these objectives consists of the following elements:

Refurbishing and Rebranding Our Signature Inns. We are in the process of refurbishing and converting our Signature Inns to Jameson Inns. We have begun with the three properties in the Southeast with the closest proximity to our Jameson Inns. We believe that our Signature Inns are well-located properties in desirable midwestern markets but with limited brand awareness. Signature Inns are quality structures, most of which were built in the 1980s. The buildings are well maintained, but have an outdated appearance, making it more difficult for them to compete with newer, nationally branded hotels. In addition, these hotel properties have not received the necessary capital expenditures in recent years to maintain their competitiveness with similarly located hotel properties operating in the economy and mid-scale segment. For the last several years, Signature Inns have generally underperformed in their markets.

We have developed a detailed capital improvement plan designed to improve and upgrade the high impact areas, such as guest rooms, common area amenities, signage and landscaping at the Signature Inns that we do not sell. We recently completed the renovation of three Signature Inns at an estimated cost of $3.8 million, which included the cost of significantly changing the exterior appearance of one of these Inns to reflect the Jameson Inn colonial style and the costs of implementing our Dreamium Bed^TM program at these three Inns. The total estimated cost of the interior renovation aspects of the remaining 12 Signature Inns to be converted is approximately $16.0 million and is being funded from operating cash flow over the next two to three years. Such cash flow will be partially made available since we no longer pay dividends on the Series A and Series S Preferred Stock that we redeemed in 2004. We may expand the scope of our renovation plan to include on a case-by-case basis the conversion of the exterior appearance of many of the remaining Signature Inns. We will evaluate the results of our conversions to assess the effectiveness of the exterior renovations, and may modify our plans based on our ongoing assessments.

We believe that our capital investment into refurbishing and rebranding our Signature Inns will allow those hotels to significantly improve their performance as measured by RevPAR and contribution to our earnings before interest, taxes, depreciation and amortization, or EBITDA. We also believe that by converting these hotels to the Jameson Inn brand in the Midwest, we will increase the overall awareness of the Jameson Inn brand, which should benefit all our Inns.

Aggressively Selling, Expanding and Marketing Our Jameson Inn Brand. We believe that aggressive marketing and promotional efforts can be instrumental in increasing our RevPAR. In 2004 we hired a Vice President of Marketing who is leading our marketing efforts, promoting our “Perfect Stay Guarantee” program, and working to implement the Jameson Stock Awards Program, our proposed guest loyalty program.

We focus our local marketing efforts on the business community in the city or town where a hotel property is located. Our general managers make sales calls on local chambers of commerce, businesses, factories, government installations and colleges and universities. The goal of these efforts is to familiarize local business people with our hotel properties in their community and to solicit their recommendation of the hotel properties to travelers visiting the community. This hands-on approach to marketing has contributed generally to the development of a strong relationship between our general managers and the local community.

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We conduct our advertising primarily through billboards that are prominently located along the highways near our Inns. Our ads appear on billboards, many of which we own. We also utilize other types of advertising, such as advertisements for the Inns in regional and special event publications and in newspapers. We believe that we provide exceptional service to our guests and rely heavily on strong word-of-mouth referrals and repeat business.

All of our Inns have direct links to the Global Distribution System for reservations which also interface with major electronic reservation systems and connect the Inns with travel agents nationally and internationally. We also market the Inns through our website http://www.jamesoninns.com and through our own call center with toll-free numbers. During 2004, website and internet bookings represented over ten percent of our business.

Our marketing efforts are designed to maximize guest satisfaction. We promote a message that every guest should have “a perfect stay, every time.” We have instituted a “Perfect Stay Guarantee” by which we commit that if a guest is not completely satisfied with all aspects of a stay at one of our Inns, there is no room charge for that guest. During 2004, we refunded approximately $1,100 a night as a result of our “Perfect Stay Guarantee.” This guarantee is mentioned prominently on our website and in lobby signage and telephone greetings, as well as much of our other advertising.

We anticipate increased travel and believe that this increased activity will afford us a timely opportunity to strategically and aggressively implement our enhanced marketing efforts. Additionally, as we complete the refurbishing and rebranding of our Signature Inns, we will re-introduce these Inns to their local markets through a well-coordinated marketing campaign, including a grand opening celebration and enhanced local sales efforts.

Jameson Stock Awards. On September 15, 2004, we filed a registration statement on Form S-3 to register 2.0 million shares of common stock in connection with the Jameson Stock Awards Program. Under the program, ten percent of the room charges paid by participants in our Jameson Stock Awards program will be used to purchase shares of our common stock. In the Company’s financial statements, the amounts applied to the purchase of these shares will not be reflected as revenues in the statements of operations, but will be recorded as additions to our stockholders’ equity. Under the program, existing shareholders will also be able to purchase stock directly from us. The registration statement has not yet been declared effective by the Securities and Exchange Commission. The program will not be implemented until the registration statement has been declared effective.

Disposition of Underperforming Properties. We have decided to sell some of the Signature Inns rather than convert them to Jameson Inns. Eight of the 23 Signature Inns have recently been listed for sale, and we have signed contracts to sell three of the eight properties listed. The properties listed for sale are Inns that the Company does not believe would achieve as high a return on the investment necessary to refurbish and convert as the other Signature Inn properties.

Since 2001, we have sold 20 Jameson Inns and three Signature Inns and have entered into franchising agreements with the buyers of 12 of the Jameson Inns. We also sold three Signature Inns, none of which are currently franchised by us. Although we do not currently plan to sell any Jameson Inns this year, we believe that new franchising arrangements will afford us an attractive opportunity to increase our return on equity. Franchising our brand to buyers also allows us to dispose of hotel properties that no longer meet our strategic objectives without losing brand awareness or recognition in these markets.

Selective Acquisition, Expansion or Development of Properties. As opportunities arise, we will consider acquiring existing, well-located hotel properties that can be refurbished and rebranded as Jameson Inns. Additionally, we will seek new development opportunities including expansion of certain Jameson Inns where we own adjacent vacant land suitable for expansion.

Since our inception, our strategy has been to grow our hotel portfolio contiguously. Our management team began developing hotels in Georgia and then expanded into surrounding states in the Southeast, completing more than 100 hotels in the past 15 years. In many instances, we also bought enough land in the initial purchase to

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expand the property if warranted and have expanded 44 properties since they were initially developed, and currently own 22 hotel properties with enough land for future expansion.

We plan to take advantage of attractive opportunities where we can continue growing either into other contiguous states or by penetrating larger, feeder markets within the 14 states we currently operate. By growing the Jameson Inn brand, we believe we can increase the value of our all our hotels by increasing our customer base and name recognition of the brand.

Jameson Franchising Program. Until we relinquished our REIT status, we were unable to franchise our brands to other hotel owners. Our franchise arrangements with purchasers of our Inns were implemented by Kitchin Hospitality and assumed by us upon our acquisition of Kitchin Hospitality. We are currently evaluating the results of our franchising efforts to determine whether to seek additional franchising opportunities. We currently do not plan to sell any more Jameson Inns or plan to franchise any of the Signature Inns that we have listed for sale. With the anticipated implementation of our guest loyalty program, our goal is to improve the operating results of our Inns and assess the impact of our recent initiatives to enhance guest amenities before we sell any additional Jameson Inns. If we later determine to sell Inns that do not meet our strategic objectives, we anticipate licensing the Jameson Inn name to the purchaser and thereby expanding our franchise operations. We feel that our marketing and reservation systems are of great benefit to hotel owners who may not have the financial or operating resources to efficiently absorb the high fixed costs associated with the development of their own systems.

Of the 20 Jameson Inns we have sold in the last four years, 12 have remained Jameson Inns. We actively train our franchisees and inspect their properties to ensure a consistent operating standard across all of our Inns. Increasing our franchising efforts will permit us to expand the geographic footprint of the Jameson Inn brand.

Our entry into the franchising business has been done at minimal cost. In our efforts to dispose of underperforming Inns, we discovered that, in many cases, potential buyers wanted to retain the Jameson Inn brand. We believe we were able to sell the hotels that remained Jameson Inns more efficiently because the purchasers were not required to obtain franchises from other hotel companies, change the signage at the properties or incur many of the other costs associated with converting to other brands. In addition, we have not incurred expensive start up costs for this new line of business.

Competition

The lodging industry is highly competitive. Competition in the industry is primarily based on service quality, range of services, brand name recognition, convenience of location, room rates, guest amenities, perceived values and quality of accommodations. We compete with other national limited and full service hotel companies as well as various regional and local hotels.

Many of our competitors have a larger network of locations and greater financial resources than we do. Each of our Inns is located in an area that has competing hotels. The more competitive hotels in a particular area, the more difficult it becomes to achieve a desirable occupancy rate and room rate. Many of our Inns are located in cities and communities in which significant new hotel and motel development has occurred in recent years. Our competitors may be able to accept more risk than we can manage prudently and may be able to access the funds needed to acquire hotels more easily and cheaply than we can. Additionally, new and existing competitors may offer significantly lower rates, greater convenience, services or amenities or superior facilities, which could attract guests away from our Inns, resulting in a decrease in occupancy rates, average daily rates, or “ADR,” and RevPAR. Changes in demographics and other changes in our markets may also adversely impact the convenience or desirability of our Inn locations, thereby reducing occupancy, ADR and RevPAR and otherwise adversely impacting our results of operations and financial condition.

We believe that we have a number of competitive strengths, including an experienced and stable management team, most of whom have been with us for many years. Our seven senior executives have more than 119 years of combined experience in the hotel industry and they have been a part of the Jameson team an average of 11.7 years.

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We have a strong proprietary brand identity. We own our brand names and, with the exception of three of our Signature Inns for which we have entered into a co-branding arrangement with Best Western International, do not have to franchise our name or operations from any other company. This allows us greater control over our operations and eliminates franchise fee payments customary with other hotel brands. We have also franchised the Jameson Inn name to purchasers of 12 Jameson Inns.

Our hotel properties are generally situated in convenient locations throughout the southeastern and midwestern United States. This regional clustering of our assets enables us to reduce our operating costs through economies of scale. For example, we are able to employ our regional property management infrastructure, spread our advertising investment and other operating overhead over a large number of properties and increase our visibility and brand recognition.

We have a strong emphasis on guest satisfaction. We believe our “Perfect Stay Guarantee” contributed significantly to the number one ranking for Jameson Inns in customer satisfaction among all of our competitors in the economy sector that cater to the general public for 2004 and 2003 by Market Metrix, Inc., a leading provider of comprehensive market research services for the hospitality industry. Market Metrix ranks hotel chains on customer satisfaction based upon the results of its random surveys of over 35,000 people each quarter about their recent hotel and other recent travel experiences.

Jameson Inns compete in the economy segment and Signature Inns compete in the mid-scale segment of the lodging industry. We believe that our primary competitors include Hampton Inn, Holiday Inn Express, Fairfield Inn and Comfort Inn.

Our Inns

Our Inns are designed to appeal to price and quality conscious travelers. Our target guests are business travelers, as well as families and leisure travelers attending events such as college or cultural gatherings, fairs, festivals and family reunions. Many of our Inns are located at high traffic areas with convenient highway access and in close proximity to restaurants and other shopping amenities and major employment centers. Additionally, certain of our Inns have meeting space that we feel is in high demand by some of our guests and differentiates us from some of our competitors.

Jameson Inns. Our Jameson Inns are colonial style, white buildings with green trim and are located in ten southeastern states. As of December 31, 2004, the average age of the 90 Jameson Inns we own was approximately 7.2 years. In late 1998, we designed and began building new three-story, interior corridor structures, each with 56 to 80 guest rooms with elevator access. Prior to 1998, we built two-story structures having 39 or 40 guest rooms with exterior corridor access to those rooms. For most of the Jameson Inns constructed prior to 1999, we acquired adjacent vacant land parcels to allow us to expand the Inns should market conditions justify such an expansion. We have expanded 44 of these Inns by constructing additional buildings with 16 to 24 guest rooms. There are an additional 22 Inns with potential for expansion.

All Jameson Inns feature amenities such as swimming pools, fitness centers, remote-controlled color television with cable programming including a premium movie channel, free local calls, complimentary deluxe breakfasts and daily newspapers. In addition, nearly all Jameson Inns currently have high-speed internet service.

Signature Inns. We acquired 26 existing Signature Inns through our merger with Signature Inns, Inc. of Indianapolis in 1999. Since 2002, we have sold three Signature Inns. Most of our Signature Inns were constructed by Signature Inns, Inc. between 1981 and 1997, and as of December 31, 2004, the average age of the 15 Signature Inns that are included in continuing operations was approximately 17.3 years. All of these facilities are interior-corridor hotels and typically contain approximately 120 guest rooms. They all have meeting spaces and business centers for our guests, and have larger guest rooms and lobbies than our Jameson Inns. Signature Inns are generally located in larger markets than our Jameson Inn locations.

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Signature Inns offer the same amenity package as our Jameson Inns. In addition, some of our Signature Inns have indoor swimming pools.

Lodging Industry

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 its guests rooms, meeting rooms, food and beverage services, room service and other guest services, and, in some cases, resort entertainment and activities. The second category, limited service hotels, generally offers rooms and amenities such as swimming pools, continental breakfasts and other limited services. The third category, all suite hotels or motels, typically offers guests more spacious accommodations, kitchen facilities in the suite, and common laundry facilities. Our brands are all limited service hotels. Smith Travel Research categorizes hotels into seven chain scales. Smith Travel Research classifies our Jameson Inns in the economy category and our Signature Inns in the limited service mid-scale without food and beverage category.

Contacting Us

Our mailing address is:

Jameson Inns, Inc.

8 Perimeter Center East, Suite 8050

Atlanta, Georgia 30346-1604.

Our telephone number is: (770) 481-0305. Our website is located at www.jamesoninns.com. On our website, we provide a link to our electronic SEC filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports. All such filings are available free of charge and are available as soon as reasonably practicable after filing.

Risk Factors

Risks Relating to Our Business

Due to the geographic concentration of our Inns, our results of operations and financial condition are subject to fluctuations in regional economic conditions.

All Jameson Inns are located in the southeastern United States and at year end approximately 19.4% of our total rooms were located in Georgia (all of which are Jameson Inns). All Signature Inns are in the midwestern United States and approximately 18.5% of our total rooms are located in Indiana (all of which are Signature Inns). For the foreseeable future we will continue to have a concentration in those two regions of the country. As a result, our hotel properties are subject to the effects of adverse economic and competitive conditions and trends in those regions and markets, and we will face a greater risk of a negative impact on our revenues in the event these areas are more severely impacted by adverse economic and competitive conditions than other areas in the United States. The concentration of hotel properties in one region or in a limited number of markets may expose us to risks of adverse economic developments which are greater than if our portfolio were more geographically diverse. These economic developments include regional economic downturns, significant increases in the number of our competitors’ properties in these markets and higher local property, sales and income taxes in the geographic markets in which we are concentrated. This geographic concentration also makes us more vulnerable to local and regional occurrences such as seasonal factors and natural disasters. Any of these could cause a reduction or decline in our revenues and cash flow.

Our hotel refurbishment and rebranding for our Signature Inns may be more costly than we anticipate.

We intend to refurbish and rebrand most of our Signature Inns. These projects are subject to a number of risks, including construction delays or cost overruns. Further, additional financing for these projects may not be

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available or, even if available, may not be on favorable terms. Any unanticipated delays or expenses incurred in connection with the refurbishment or rebranding of the Signature Inns could impact expected revenues, negatively affect our reputation among hotel guests and otherwise adversely impact our results of operations and financial condition.

We have incurred a substantial amount of debt, and we may incur additional indebtedness in the future, all of which increases our expenses and the risks of unprofitable operations.

Our outstanding indebtedness as of December 31, 2004 was approximately $197.8 million, of which approximately $171.6 million has rates which are adjustable over the next 12 months. Substantially all of our outstanding indebtedness is secured by individual hotel properties. For the year ended December 31, 2004, our outstanding indebtedness had a weighted average annual interest rate of 5.2%. Our ratio of long-term debt (including current portion) to equity was 2.49 to 1. Neither our articles of incorporation nor our bylaws limit the amount of indebtedness that we may incur. Subject to limitations in our debt instruments, we may incur additional debt in the future to finance renovations and acquisitions and for general corporate purposes. Our board has adopted a policy of limiting our mortgage debt to 65% of the aggregate value of the Inns we own, based on the most recent appraisals we have, however that policy could be changed at any time. Accordingly, we could become more highly leveraged, resulting in an increase in debt service that could reduce our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions (including increases in interest rates) and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. Our indebtedness is, and will likely continue to be, secured by mortgages on our owned Inns. We cannot assure you that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets, including our owned Inns, to foreclosure. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable to us. In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to sell one or more owned Inns at times that may not permit realization of the maximum return on our investments. Economic conditions could result in higher interest rates, which would increase debt service requirements on variable rate debt and could reduce the amount of cash available for various corporate purposes.

We have a substantial amount of debt maturing in the next three years. At year end we had scheduled aggregate principal payments and maturing loans of approximately $50.0 million, $51.1 million, and $28.9 million, respectively, for each of the next three years. If we are unable to successfully negotiate renewal or extensions of that debt or obtain refinancing on favorable terms, we may be forced to sell assets or lose hotel properties to foreclosure.

Our lack of industry diversification makes us more vulnerable to economic downturns.

We currently, and intend in the future to, invest primarily in lodging properties. This concentration of our investments in a single industry segment makes us more vulnerable to adverse effects of occurrences such as economic downturns. A weakness in the economy or a downturn in the lodging industry in general or in the economy and mid-scale segment in particular could have a more significant effect on the operation of our Inns and, therefore, on revenues and cash flow than if our investments were more economically diverse.

Our franchising program depends upon third party owners/operators who may not fulfill their franchising obligations, including failing to make timely payments to us and failing to maintain quality control consistent with the Jameson Inn standard.

The success of our franchising program is in large part dependent upon the manner in which our franchisees adhere to their respective franchise agreements and operating standards, which include:

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In addition, while we have contractual controls over each franchisee, we do not have control over the day-to-day operations of franchisees. As a result, third party franchisees may not appropriately use and protect our Jameson Inn brand, which may decrease its value or expose it to legal challenges, which, in turn, could subject us to substantial loss and expense. Approximately 5.8% of the total rooms in our system are owned and operated by our franchisees. The fees and other revenues we received from our franchising operations during 2004 represent less than 1% of our total revenues for that period.

Our business could be harmed if key personnel terminate their employment with us.

Our success is dependent on the efforts of our management team. Our seven senior executives have more than 119 years of combined experience in the hotel industry. While we believe we could find replacements for these key personnel, the loss of their services could hurt our efforts to conduct our operations in an effective and efficient manner. We currently own and are the beneficiary of key person life insurance in the amount of $1,000,000 for Thomas W. Kitchin, our chairman and chief executive officer.

We have common stock ownership limitations in our articles of incorporation which could restrict the marketability or liquidity of our common stock.

In connection with our election in 1994 to be taxed as a real estate investment trust we included certain ownership restrictions in our articles of incorporation to assist us in our efforts to qualify as a REIT. Since our status as a REIT has been relinquished, these stock ownership restrictions are no longer needed. Our board of directors approved an amendment to our articles of incorporation to remove all of these provisions to the extent they are applicable to shares of our common stock. However, the proposed amendment was not approved by our shareholders at our annual meeting on June 4, 2004. Consequently, the ownership restrictions will continue. It is possible that these restrictions could be enforced in the future in a manner that might discourage a change of control.

Provisions in our charter documents may make it difficult for a third party to acquire us and could depress the price of our common stock.

Our articles of incorporation and bylaws contain provisions that could delay, defer or prevent a change of control of the Company. These provisions could make it more difficult for shareholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for the shares of our common stock. These provisions include:

Our business is seasonal in nature, and we are likely to experience fluctuations in our results of operations and financial condition.

Our business is seasonal in nature, with the months from April through September generally accounting for a greater portion of annual revenues than the months from October through March. Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. The seasonal nature of our business increases our vulnerability to risks such as labor force shortages and cash flow problems. Further, if

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an adverse event such as an actual or threatened terrorist attack, international conflict, regional economic downturn or poor weather conditions should occur during the months of April through September, the adverse impact to our revenues could likely be greater as a result of our seasonal business. Since we have relinquished our status as a real estate investment trust and we are no longer simply a passive owner of our properties, we are much more susceptible to these sorts of risks.

The costs of defending and paying claims asserted against us could be substantial and reduce the funds we would otherwise have available to meet our other working capital needs.

At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of these proceedings cannot be predicted. If a plaintiff were successful in a claim against us, we could be faced with the payment of a material sum of money. If this were to occur, it could weaken our financial condition and reduce our prospects for profitability. For the discussion of pending litigation, see Item 3—Legal Proceedings.

We may experience material losses in excess of insurance coverage which could hurt our prospects for profitability.

We carry comprehensive liability, public area liability, fire, flood, pollution, environmental, boiler and machinery, extended coverage and business interruption insurance covering our hotel properties. There are, however, certain types of catastrophic losses that are not generally insured because it is not economically feasible to insure against such losses. We cannot assure you that material losses in excess of insurance coverage will not occur in the future. In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in an Inn, as well as the anticipated future revenue from the Inn. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate an Inn after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.

Risks Relating to the Lodging Industry Generally

Our operating results are subject to the various operating risks common to the lodging industry, many of which are beyond our control.

Our revenues and our operating results are subject to the various operating risks common to the lodging industry, many of which are beyond our control. These include:

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While indicators of improving industry fundamentals lead us to believe that demand for lodging services will increase during 2005, we are not able to assure you that the recent trend in these results will continue.

Our expenses may remain constant even if revenues decline, thus restricting our prospects for profitability.

The expenses of owning property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from an Inn. Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately. In such instances, our financial condition and ability to service debt could be impaired by:

We are subject to governmental regulations affecting the lodging industry; the costs of complying with governmental regulations, or our failure to comply with such regulations, could affect our financial condition and results of operations.

We are subject to numerous federal, state and local government regulations affecting the lodging industry, including building and zoning requirements. Increased government regulation could require us to make unplanned expenditures and result in higher operating costs. Further, we are subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could increase expenses and result in lower operating margins. Under the Americans with Disabilities Act of 1990 (the “ADA”), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. We may be required to remove access barriers or make unplanned, substantial modifications to our Inns to comply with the ADA or to comply with other changes in governmental rules and regulations, which could reduce the number of total available rooms, increase operating costs and have a negative impact on revenues and earnings. Any failure to comply with ADA requirements or other governmental regulations could result in the U.S. government imposing fines or in private litigants winning damage awards against us.

Failure of the U.S. lodging industry to exhibit continued improvement may impede our ability to execute our business plan.

A substantial part of our business plan is based on our belief that the U.S. lodging markets will continue to benefit from the recent improving economic fundamentals. We cannot be sure as to whether, when, or to what extent lodging industry fundamentals will in fact continue to improve. In the event conditions in the industry do not continue to improve as we expect, our ability to execute our business plan may be impeded.

The increasing use of third party travel websites by consumers may hurt our profitability.

Some of the rooms at our Inns will be booked through third party travel websites such as Travelocity.com, Expedia.com and Priceline.com. If these internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of

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these internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three star downtown hotel”) at the expense of brand identification. We believe that these internet intermediaries hope that consumers will eventually develop brand loyalties to their reservation systems rather than to our brands. Although most of the business for our Inns is expected to be derived from traditional channels, if the amount of sales made through internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be impacted.

The uncertainty of future terrorist attacks and military activity may negatively impact the travel and lodging industries.

We are unable to predict with certainty the impact that terrorist attacks, future events such as military or police activities in the United States or foreign countries and future terrorist activities or threats of such activities, could have on our business. In addition, other terrorist attacks, acts of war, prolonged U.S. involvement in Iraq or other significant military activity could have additional adverse effects on the economy in general, and the travel and lodging industry in particular. These factors could have a material adverse effect on the markets on which shares of our common stock will trade, the lodging industry at large, and our results of operations, financial condition and ability to service debt.

The existence of mold in our owned Inns could result in substantial costs or restrictions on the use of our hotel properties.

Some of our owned Inns could have problems with mold caused by excessive moisture, which accumulates in buildings or on building materials. Some molds are known to produce toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold can cause a variety of health effects and symptoms in certain individuals including allergic or other reactions. With the exception of one owned Inn, we have been able to remediate the mold presence discovered in our owned Inns without material cost. We have one owned Inn in which approximately 75 rooms have been taken out of service for a number of reasons, including the presence of mold. We are not insured for losses related to the presence of mold at that Inn. We have entered into a contract to sell this hotel, which should close in the second quarter of 2005. In addition, we may incur substantial remediation costs and lost revenues during any remediation process if we discover mold in our other owned Inns, or if the costs related to mold such as legal and insurance expense continue to increase rapidly, which, in turn, could significantly increase our operating costs and reduce our earnings.

Risks Related to the Real Estate Industry

Our inability to sell real estate when appropriate may hurt our financial condition.

Real estate assets generally cannot be sold quickly. We may not be able to sell our owned Inns or other real estate promptly in response to economic or other conditions. This inability to respond promptly to changes in the performance of our assets could hurt our financial condition. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our owned Inns.

Risks associated with real estate ownership may restrict revenue or increase expenses.

We are subject to varying degrees of risk that generally arise from the ownership of our Inns. Revenue from our Inns may be restricted or hurt by changes beyond our control, including the following:

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An increase in interest rates or property and other taxes could increase expenses and restrict our cash flow. Adverse conditions such as those discussed above could cause the terms of our borrowings to become unfavorable to us. In such circumstances, if we were in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to sell one or more Inns at times that might not permit realization of the maximum return on our investments. Unfavorable changes in one or more of these conditions could also result in unanticipated expenses and higher operating costs, thereby reducing operating margins and otherwise hurting our results of operations and financial condition.

Risks Relating to Share Ownership

The market price for our common stock may be volatile, and you may not be able to sell our stock at a favorable price or at all.

Many factors could cause the market price of our common stock to rise and fall, including:

It is possible that the proceeds from sales of our common stock by a shareholder may not equal or exceed the costs and fees associated with selling the stock.

Substantial sales of our common stock, or the perception that such sales might occur, could depress the market price of our common stock.

Substantially all of the shares of our common stock are eligible for immediate resale in the public market. We cannot predict whether future issuances of our common stock or resales in the open market will decrease the market price of our common stock. The exercise of any options or the vesting of any restricted stock granted to directors, executive officers and other employees under our stock incentive plan, the issuance of common stock or units in connection with property, portfolio or business acquisitions and other issuances of our common stock could have an adverse effect on the market price of our common stock. In addition, future issuances of our common stock may be dilutive to existing shareholders. Any sales of substantial amounts of our common stock in the public market, or the perception that such sales might occur, could lower the market price of our common stock.

Since we do not expect to pay cash dividends on our common stock, our stock may be less desirable as an investment and have a lower market price than it might if we paid dividends.

We do not anticipate that we will pay cash dividends on our common stock in the foreseeable future. Instead, we intend to apply any available cash flow to repay indebtedness and to the expansion and development of our business. Our failure to pay dividends on our common stock may make it less desirable as an investment, thus having a depressive effect on its price compared to what it might be if we did pay dividends.

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We are subject to environmental risks that could be costly.

Our operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of compliance with future environmental legislation. Under current 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 contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may restrict the ability of the owner of the property to borrow using such property as collateral for a loan or to sell such property. Phase I environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated, and may impose remedial or compliance costs. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have an adverse effect on our results of operations and financial condition. While we have not been notified by any governmental authority and we have no other knowledge of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in connection with any of our properties, we cannot assure you that we will not discover problems that currently exist but to which we have no current knowledge, that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our existing and future properties will not be affected by the condition of neighboring properties (such as the presence of leaking underground storage tanks) or by third parties (whether neighbors such as dry cleaners or others) unrelated to us.

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. 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 remediate a 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 these substances at the disposal or treatment facility, whether or not the facility is owned or operated by them.

While we have not incurred any costs related to these matters in connection with our 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. A Phase I environmental assessment has been conducted by a qualified independent engineer for each of our Inns except for our Signature Inn located in Springfield, Illinois. A Phase I environmental assessment involves researching historical usages of a property, databases containing registered underground storage tanks, and other matters, including an on-site inspection, to determine whether an environmental issue exists with respect to the property which needs to be assessed. We have not encountered any material environmental issues or problems in connection with our ownership and operation of our Inns. 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.

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.

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We have experienced some issues regarding the presence of mold in some of our Inns which is discussed under “Risk Factors—Risks Related to the Lodging Industry Generally—The existence of mold in our owned Inns could result in substantial costs or restrictions on the use of our hotel properties.” However, we do not consider this mold to be a hazardous or toxic substance.

Americans with Disabilities Act. Under 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 these 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, and we have made these improvements. We have also incorporated the consultants’ recommendations into the construction of new Jameson Inns and plan to do so in the future.

Employees

At December 31, 2004, we employed approximately 2,100 full- and part-time employees who are primarily engaged in day-to-day operations of the Inns. None of our employees is represented by a union or labor organization, nor have our operations ever been interrupted by a work stoppage. We consider relations with our employees to be excellent.

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 our stock will not decrease.

Investment Objectives and Policies. Our investment objective is to improve our earnings and return on equity by deploying our available capital into debt repayment or into our hotel operations and assets. We will seek to accomplish these objectives through the ownership and operation of the Inns, increases in the Inns’ room revenues and selective development and expansion of Inns. For related disclosures, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We currently intend to invest only in our Inns (as well as our billboards), although we may also hold temporary cash investments from time to time pending investment. 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.

Financing. Historically, we have financed all of the costs of developing new Inns and expanding existing Inns with bank borrowings and with proceeds from the issuance of common stock. However, as a result of the redemption of our outstanding preferred stock, we expect to be able to fund a substantial amount of our future capital needs such as our Signature Inn conversions through internally generated cash flow. Nevertheless, incurring additional debt is likely to be a significant means of financing any substantial growth in the future.

We may incur indebtedness 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 working capital, to refinance existing indebtedness or to finance acquisitions, expansions or development of new Inns. Much of our current mortgage indebtedness is with recourse to us. At December 31, 2004, we had outstanding an aggregate of approximately $197.7 million of mortgage debt. In addition, at December 31, 2004, we had lines of credit drawn totaling $110,000 with remaining availability of $4.5 million.

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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.

Conflicts of Interest. Because of Thomas W. Kitchin’s ownership of Kitchin Hospitality prior to January 2, 2004 and his position with Jameson, there were inherent conflicts of interest in the operations of our Inns, the construction of new Jameson Inns, and the expansion, refurbishment and other capital expenditures relating to existing Inns by Kitchin Hospitality. It is our current intention that we will no longer enter into material contracts with companies owned by our officers or directors. Conflicts of interest also existed in our dealings with Kitchin Hospitality under the master leases and under the cost reimbursement agreement between the two companies. These conflicts of interest were eliminated upon our acquisition of Kitchin Hospitality. In addition, Thomas W. Kitchin has agreed to additional provisions in his employment contract with us that provide that he will not compete with us in our existing lines of business and territories without the approval of our independent directors.

Under the rules of The Nasdaq National Market, transactions between us and one or more of our directors, officers, 5% shareholders or any member of such person’s immediate family, or between us and any other entity in which a director has a financial interest must be approved by our audit committee or another independent body of the Board of Directors.

Taxation of Jameson

Prior to January 1, 2004, we were taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our taxable year beginning January 1, 1994. We terminated our status as a REIT effective January 1, 2004 after approval by our shareholders. As of January 1, 2004, any distributions to common or preferred shareholders are not deductible for purposes of computing our taxable income and we are subject to income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, without offset for distributions of such income to our shareholders.

As a REIT, we were required to distribute at least 90% of our net taxable income annually in order to maintain our REIT qualification. No such minimum-distribution requirements apply to us beginning on January 1, 2004. The dividend paid on shares of our common stock has been suspended, for the foreseeable future, in favor of retaining earnings and cash flow.

With the relinquishment of our REIT status, we will be taxed under the general rules applicable to C corporations. Consequently, we could pay up to 35% of our taxable income in federal taxes and also pay applicable state taxes. As a C corporation, any distributions in respect of our stock would be taxed as dividends to the extent of our current and accumulated earnings and profits. Distributions in excess of our current and accumulated profits would be taxed to a shareholder as a return of capital to the extent of the shareholder’s tax basis in his stock, and the amount of a distribution in excess of the shareholder’s tax basis would be taxed as a capital gain (a long term capital gain if the shareholder has held our stock for more than one year). Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, the maximum federal income tax rate applicable to dividends and long term capital gains derived from a stock investment is 15%. On the other hand, distributions to corporate shareholders may be eligible for the dividends received deduction, subject to certain limitations in the Internal Revenue Code, whereas distributions from REITs are not eligible for the dividends-received deduction.

The relinquishment of our status as a REIT is part of our strategic decision to improve our earnings and return on equity by deploying our available capital into debt repayment and hotel development and operations. Since we are no longer subject to the restrictions under the Internal Revenue Code imposed upon REITs, we are now able to operate our properties ourselves.

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Recent Developments

On March 15, 2005, we completed a private offering of $26,250,000 trust preferred securities through Jameson Inns Financing Trust I, a Delaware statutory business trust sponsored by us. The trust used proceeds of the issuance, together with the proceeds of the purchase by us of $812,000 of the trust’s common securities, to purchase $27,062,000 aggregate principal amount of our Junior Subordinated Notes. The Junior Subordinated Notes mature on March 30, 2035. We are using the proceeds from the Junior Subordinated Notes to retire current debt and for general corporate purposes.

ITEM 2. PROPERTIES

The Inns. At December 31, 2004, the Company owned and operated 113 Inns, of which 90 are Jameson Inns, located predominantly in the southeastern United States, and 23 are Signature Inns, located predominantly in the midwestern United States. The Company franchises the use of the Jameson Inn brand to the owners of twelve other Jameson Inns.

The Company’s 113* owned and twelve franchised Inns are located in the following fourteen states:

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.

Our directors were defendants in the case captioned: Tammy Newman v. Jameson Inns, Inc. et al., Superior Court, DeKalb County, Georgia, which was a shareholder lawsuit filed October 31, 2003 seeking class action status and derivative status for claims based on our acquisition of Kitchin Hospitality, LLC. Plaintiff also named Jameson Inns, Inc. as a nominal defendant. This case was settled by agreement of the parties for certain non-monetary actions we agreed to take and a payment to the plaintiff’s attorneys for their legal fees of $175,000. In addition, Thomas W. Kitchin has agreed to additional provisions in his employment contract with us that provide that he will not compete with us in our existing lines of business and territories without the approval of our

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independent directors. We also paid the costs of providing notice of the settlement to our shareholders, which were approximately $25,000. We incurred legal fees on behalf of both the company and our directors (as required under our indemnification agreements with those directors). Our directors and officers liability insurance carrier reimbursed us for $100,000 of the costs of settling this case. In September 2004, the final settlement of this case was approved by the court and the case was dismissed. In October 2004, payment was made to the plaintiff’s attorneys and reimbursement was received from the insurance carrier.

Jameson Inns, Inc., Kitchin Hospitality, LLC and an employee of Kitchin Hospitality were named as defendants in a case filed on January 20, 2004 in the Circuit Court of the First Judicial District of Hinds County, Mississippi by Jim and Barbara Doe, individually and as natural parents of Ann Doe, a minor. The plaintiffs are seeking $20 million actual and $5 million punitive damages for injuries sustained by Ann Doe as a result of an alleged sexual assault by two minor boys who were visiting our Inn in Pearl, Mississippi. Pursuant to a motion we filed, this case was moved to the Circuit Court of Rankin County by virtue of an order of the Supreme Court of Mississippi entered on November 10, 2004. We have denied any liability for any injuries sustained by Ann Doe or her parents based on the factual circumstances and applicable law. We will vigorously defend against this claim. We are insured for this claim and we do not expect that this case will have any material adverse effect upon our financial condition.

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

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on The Nasdaq National Market under the symbol “JAMS.” As of March 29, 2005, there were approximately 3,200 holders of record of our common stock and, we estimate, approximately 6,100 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 anticipate that we will not pay dividends on our common stock for the foreseeable future.

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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. The historical consolidated financial information is not necessarily indicative of the results of future operations and should be read together with our historical consolidated financial statements and related notes thereto and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this document.

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 Inns, certain information may not be comparable between periods. The selected financial data tables below show certain historical financial and other information relating to our Inns included in continuing operations. Discontinued operations exclude properties sold with franchise or other agreements which indicate the Company has some form of continuing involvement in the future cash flows of the disposed properties. Lodging revenues in 2003, 2002, 2001 and 2000 were earned by Kitchin Hospitality, the lessee of the Inns.

JAMESON INNS, INC.

SELECTED FINANCIAL INFORMATION

(dollars in thousands, except per share data)

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

The following discussion should be read and considered in conjunction with our historical consolidated financial statements and the accompanying notes which are included elsewhere in this report. This discussion includes forward-looking statements about our business which are based on certain current expectations and assumptions that are subject to change due to risks and uncertainties. Actual results could materially differ due to factors which are discussed in “Forward Looking Statements” and “Risk Factors” elsewhere in this report.

Overview

From 1994 through December 31, 2003, we operated as a real estate investment trust (REIT) for federal income tax purposes. On January 2, 2004, we acquired Kitchin Hospitality and relinquished our status as a REIT. With the closing of the acquisition, Kitchin Hospitality became our wholly owned subsidiary and we now both own and operate our Inns. In 2004, room rental revenues were received directly by us, and we bear all of the hotel operating and administrative costs and expenses. As of December 31, 2004, we owned 90 Jameson Inns and 23 Signature Inns, all of which were classified as being within the economy and mid-scale segments of the lodging industry. We did not purchase, build or expand any hotels in 2004.

Until December 31, 2003, all of our hotels were leased to Kitchin Hospitality under certain master leases pursuant to which we received rental payments, which were our only substantive source of revenues. Room revenues in 2003 were earned by our lessee, Kitchin Hospitality, and are the basis upon which the percentage rent earned by us until December 31, 2003 (under the master leases) was determined. In addition to our ownership of our hotels, we also own billboards and other related assets. The billboards were leased to Kitchin Hospitality and to other parties, and the rental revenues were our sole source of revenue from these assets.

Room revenues are affected by a number of factors, including the economy, demand for business and leisure travel, the conflict in Iraq, terrorist threat assessments and national security alert levels, regional and local economic factors, the retail price of oil and gasoline, oversupply of rooms in specific markets, the effects of penetration over the last several years by competitors into certain secondary and tertiary markets in which we have historically operated and direct competition as to room rates.

Key Performance Indicator

The primary financial indicator of our performance is our RevPAR and the factors contributing to it, our occupancy rate and our average daily room rate. Control of our operational and administrative expenses is an important aspect of our business since we are now operating our Inns, although many of the operational expenses vary in proportion to the number of rooms that we operate. Thus, we believe that the results of our efforts to grow RevPAR are the single-most important factor in determining our future financial performance.

Based on information from several observers of our industry and our recent experience, we expect demand for lodging services to increase during 2005. As a result, we expect RevPAR growth to continue in 2005 due primarily to an expected increase in business and leisure travel.

Management’s Priorities

Our highest priority for 2005 is RevPAR growth. In addition, for 2005 our other principal priority is the re-branding of our Signature Inn hotels. We also intend 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, entry into additional long-term debt financings, engaging in related lines of new business, such as franchising the use of our trademark names or operating hotel properties owned by third

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persons and other alternatives. We have made no decisions or commitments at this time, but we intend to continue to consider any of these alternatives. Our long-range plan is to grow the Jameson Inn brand as opportunities for growth become available which may include, among other things, new development or franchising of the brand.

Results of Operations

Lodging revenues were earned by our lessee, Kitchin Hospitality, during 2003. We recorded lease revenues derived from the room revenues based on the master lease agreements we had in place with Kitchin Hospitality. In conjunction with the consummation of the acquisition of Kitchin Hospitality, we now recognize the lodging revenues and expenses in our financial statements. For comparison purposes we are presenting the following unaudited pro forma income statement for the year ended December 31, 2003. Historical amounts for Jameson Inns, Inc. and Kitchin Hospitality, LLC have been restated to reflect reclassifications for discontinued operations.

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Jameson Inns, Inc.

Unaudited Pro Forma Condensed Operations Data

Year Ended December 31, 2003

(amounts in thousands, except per share data)

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Explanations of Pro Forma Adjustments:

The following notes describe the pro forma adjustments necessary to reflect the effects of our common stock offering in July 2004 and the acquisition of Kitchin Hospitality, less excluded operations, as if the transactions had been consummated effective January 1, 2003.

Note A—This column represents the effect of eliminating the operations of Kitchin Hospitality which were not acquired by us as part of the acquisition of Kitchin Hospitality.

Note B—The pro forma adjustments to “Renovation and refurbishment revenues” and “Costs of renovations and refurbishments” represent the elimination of revenues and related costs of revenues for operating property and equipment sold by Kitchin Hospitality to us. The net effect of approximately $209,000 represents the capitalized profit charged by Kitchin Hospitality to us on property and equipment sold to us. The pro forma adjustment to “Depreciation” represents the elimination of the depreciation expense of approximately $69,000 related to the capitalized amount.

Note C—The pro forma adjustments to “Lease revenues” and “Lease expense” represent the elimination of lease payments recorded by Kitchin Hospitality and revenues recorded by us for the leases of the owned Inns and the billboards.

Note D—The pro forma adjustments to “Overhead reimbursements” and “Corporate general and administrative” represent the elimination of overhead payments recorded by us and revenues recorded by Kitchin Hospitality related to overhead services provided by Kitchin Hospitality to us. Kitchin Hospitality did not charge a profit on the overhead reimbursement, which represented a reimbursement of costs.

Note E—The pro forma adjustment to “Cost of acquisition” eliminates costs considered non-recurring resulting directly from the acquisition of Kitchin Hospitality.

Note F—The pro forma adjustment represents the income tax expense for the combined company for the year ended December 31, 2003. The income tax expense has been computed at an effective tax rate of 39.6%.

Note G—The pro forma adjustment to “Preferred stock dividends” represents the elimination of preferred stock dividends as a result of the redemption of preferred stock.

Note H—The pro forma adjustment to “Weighted average shares outstanding—basic” reflects the issuance of 2,153,366 shares in connection with the acquisition of Kitchin Hospitality and the issuance of 43,000,000 shares in connection with our July 2004 common stock offering.

Note I—The pro forma adjustment to “Weighted average shares outstanding—diluted” reflects the issuance of 2,153,366 shares in connection with the acquisition of Kitchin Hospitality and the issuance of 43,000,000 shares in connection with the July 2004 common stock offering, and the effect of dilutive securities.

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Key Operating Statistics

The operating data tables below show certain historical financial and other information relating to our owned Inns included in continuing operations. We include in discontinued operations assets held for sale and assets sold with respect to which we did not enter into, or anticipate entering into, a franchise or other agreement. Lodging revenues in 2003 and 2002 were earned by Kitchin Hospitality, the lessee of the Inns.

Comparison of the Year Ended December 31, 2004 to the Pro Forma Year Ended December 31, 2003

For fiscal 2004, we recorded lodging revenues of $82.6 million versus pro forma lodging revenues of $82.8 million in 2003. Revenues were relatively flat due to a 3.1% rise in RevPAR in 2004, offset by fewer room nights available to rent and a decline in other revenues not included in the calculation of RevPAR in 2004. In 2004 occupancy rates for our hotels increased from 51.7% to 51.8%. Most of our increase in RevPAR is a result of a $1.73 increase in our ADR. Our owned Jameson Inns increased RevPAR by 5.4% in 2004 as a result of a 1.1 point increase in occupancy and a $1.96 increase in ADR. Our Signature Inn RevPAR decreased 4.9% in 2004 as a result of a 2.8 point decrease in occupancy, partially offset by a $1.18 increase in ADR.

Our direct lodging expenses increased 5.5%, or $2.3 million, in 2004. The increase in direct lodging expenses results from increases of hotel level administrative and general expenses of $762,000, rooms expenses of $313,000, marketing expenses of $443,000 and repair and maintenance expenses of $712,000.

Our property and other taxes and insurance expenses were down 2.5%, or $137,000, in 2004. The slight decrease is a result of us having fewer rooms available to rent in 2004 and property tax rates and insurance premiums being relatively flat.

Our depreciation expense was down $3.3 million in 2004 compared to pro forma 2003 as a result of many of our shorter life assets still in use being fully depreciated and not immediately replaced.

Our corporate general and administrative expenses increased $1.7 million in 2004 as a result of higher payroll costs, professional fees, and start up costs associated with the Jameson Stock Awards Program.

As a result of the above year over year changes in revenues and operating expenses our income from operations was $12.5 million, down $775,000 from pro forma 2003.

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Our interest expense was $10.2 million in 2004 compared to $11.4 million in 2003. The decrease is a result of having less debt outstanding and slightly lower interest rates during 2004. In the last two years we have reduced our outstanding indebtedness by $25.0 million. Our weighted average interest rate the last two years was 5.2% and 5.5% for 2004 and 2003, respectively.

In 2004 we incurred $66,000 in expense related to the early extinguishment of debt compared to $211,000 in 2003. We incur charges when we pay off a loan before its maturity date and expense the remaining deferred finance costs. We usually pay loans off early as a result of refinancing debt on a property or the sale of a property.

In 2004 we recorded a lease termination expense of $9.0 million as a result of the acquisition of Kitchin Hospitality, LLC, the former lessee of all our properties. We expensed the consideration for the transaction in 2004.

In 2004 we recorded an impairment charge of $50,000 on a tract of land. In 2003 we recorded an impairment charge on two Inns in continuing operations of $710,000.

In 2004 we had a net gain of $767,000 on the four Inns, two tracts of land, two billboards and miscellaneous equipment that we sold during the year. In 2003 we had a net gain of $56,000 on the sale of two Inns and a tract of land.

When we relinquished our tax status as a real estate investment trust, we established a deferred tax asset of $1.4 million to account for our change in taxable status. After reviewing our fourth quarter 2004 financial results and updating our analysis on the realizability of deferred tax assets, we booked a valuation allowance for 100% of this tax asset. The net effect for the full year was income tax expense of $1.4 million that completely offsets the income tax benefit of $1.4 million recognized in the first quarter of 2004.

As a result of the above year over year changes, we had a net loss from continuing operations, excluding preferred stock dividends, of $6.0 million in 2004 compared to pro forma net income from continuing operations of $600,000 in 2003.

Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002

For fiscal 2003, we earned base rent and percentage rent in the aggregate amount of $36.4 million, relatively flat with 2002. We experienced a slight increase in our overall occupancy rate, which was mostly offset by slight decreases in our average daily rate and number of available rooms in 2003. We believe that the weak economy and the lingering effects of terrorist actions world-wide continued to negatively impact us and our industry in general during 2003.

Our property and other taxes and our insurance expenses in 2003 increased a total of $543,000, or 10.8%, compared to 2002 primarily due to increased rates and premiums in 2003 and the effect of a one-time reduction in our franchise taxes in 2002 resulting from a $197,000 refund.

Our depreciation expense was down to $16.3 million from $18.0 million in 2002 due primarily to many of our shorter-life assets still in use being fully depreciated and not immediately replaced.

Our corporate general and administrative expense included an allocation of salary, office overhead and other general and administrative costs of the corporate office. Until December 31, 2003, we shared employees and office space with Kitchin Hospitality. Our general and administrative expenses for 2003 increased to $2.8 million from $2.3 million in 2002 due to additional time spent by shared employees historically in our business matters as compared to Kitchin Hospitality’s. For 2004 and future years, all of the general and administrative expense historically incurred by Kitchin Hospitality is reported by us on a consolidated basis.

As a result of the above year over year changes in revenues and operating expenses, our income from operations was $11.9 million, up $633,000 from 2002.

Our interest expense decreased from $13.3 million in 2002 to $11.4 million in 2003. This was the result of the weighted average interest rate on our debt of 5.5% during 2003 compared to 6.1% during 2002. Our net principal balance of our outstanding debt was reduced $9.0 million during 2003.

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We incurred acquisition expenses of approximately $1.6 million consisting of professional fees (investment banking, legal, and accounting) in connection with our acquisition of Kitchin Hospitality, LLC and a related shareholder lawsuit settlement in 2003.

During 2003, we experienced a positive net impact on our earnings of approximately $56,000 as a result of the sale of two Inns and a tract of land, compared with a net gain of approximately $568,000 upon the sale of four Inns.

In 2003 we recorded an impairment charge on two Inns in continuing operations of $710,000. In 2002 no impairment charge was recorded.

As a result of the above year over year changes, we had a net loss from continuing operations, excluding preferred stock dividends, of $2.0 million in 2003 compared to a net loss from operations of $1.5 million in 2002.

EBITDA—Supplemental Non-GAAP Information

We consider EBITDA to be an indicator of operating performance because it can be used to measure our ability to service debt, fund capital expenditures and expand our business. EBITDA is defined as income before interest expense, income tax expense, preferred stock dividends, depreciation and amortization and certain non-recurring items. We consider lease termination costs and the redemption of preferred stock incurred in 2004 “non-recurring” under relevant SEC guidelines.

This information should not be considered as an alternative to any measure of performance as promulgated under U.S. generally accepted accounting principles (GAAP), nor should it be considered as an indicator of our overall financial performance. Our calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited.

The items listed below have not been included as adjustments in the above calculation of EBITDA:

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We use EBITDA to measure the financial performance of our operations because it excludes interest, preferred dividends, income taxes, and depreciation, which bear little or no relationship to hotel operating performance. EBITDA from continuing operations also excludes those items which relate to net loss from discontinued operations. By excluding interest expense and preferred dividends, EBITDA measures financial performance irrespective of our capital structure or how we finance our hotel properties and operations. By excluding income taxes, EBITDA provides a basis for measuring the financial performance of our operations excluding income taxes. By excluding depreciation expense, which can vary from hotel to hotel based on historical cost and other factors unrelated to the hotels’ financial performance, EBITDA measures the financial performance of our operations without regard to their historical cost. For all of these reasons, we believe that EBITDA and EBITDA from continuing operations provide information that is relevant and useful in evaluating our business.

However, because EBITDA excludes depreciation, it does not measure the capital required to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense and preferred dividends, it does not take into account the total amount of interest paid on outstanding debt and preferred dividends nor does it show trends in interest costs due to changes in borrowings or changes in interest rates. EBITDA, as defined by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net loss/income (and in the case of EBITDA from continuing operations, to net loss/income from continuing operations), which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net loss/income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.

Liquidity and Capital Resources

Overview

Prior to 2004, we were organized as a REIT and were required to distribute to stockholders at least 90% of our taxable income. The relinquishment of our status as a REIT in January 2004 eliminated this requirement. However, by relinquishing our status as a REIT beginning in 2004, we are subject to payment of federal and state income taxes. In addition, due to the acquisition of Kitchin Hospitality on January 2, 2004, we are now exposed to greater business risks, including the fluctuation of cash flows related to the operation of hotels due to the seasonal nature of our business. Our hotel revenues are generally greater in the second and third quarters than in the first and fourth quarters.

Our short-term liquidity needs include funds for interest and principal payments on our outstanding indebtedness, funds for maturing loans and funds for capital expenditures. We expect to meet our short-term liquidity requirements generally through net cash provided by operations and reserves established from existing cash, refinancing maturing mortgages and, if necessary, by drawing upon our lines of credit.

In general, we expect to meet our long-term liquidity requirements for the funding of hotel property development, including rebranding of Signature Inns to Jameson Inns, property acquisitions, renovations and other nonrecurring capital improvements through net cash from operations, long-term secured and unsecured indebtedness, including our credit facility and the recently closed trust preferred securities offering of $26.3 million, through the issuance of additional equity securities and through joint ventures.

Historically, our cash and capital requirements have been satisfied through cash generated from operating activities, borrowings under our credit facilities, and the issuance of equity securities. We believe cash flow from operations, available borrowings under our credit facilities and cash on hand will provide adequate funds for our foreseeable working capital needs, planned capital expenditures and debt service and other obligations through 2005.

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Our ability to fund operations, make planned capital expenditures, and be in compliance with the financial covenants under our debt agreements will be dependent on our future operating performance and our success in extending or refinancing current debt maturities. Our future operating performance is dependent on a number of factors, many of which are beyond our control, including occupancy and the room rates we can charge.

Cash Flows From Operations

Our net cash provided by operations was approximately $18.4 million in 2004. In 2004, lodging revenues were received directly by us, and we bear all of the hotel operating and administrative costs and expenses.

Our other principal sources of liquidity are:

These funds are used to meet the principal repayments of our amortizing debt, the refurbishing costs and capital maintenance of our existing Inns, and certain other cash requirements. Now that we no longer have the requirement to pay annually $6.7 million in preferred dividends, we have more free cash flow to invest in our business.

Investing Activities

Our net cash used in investing activities for 2004 totaled $1.9 million. We received net cash proceeds totaling $5.1 million from the sale of four Inns. In addition, we received $3.2 million from sales of two Inns classified as discontinued operations. Proceeds from these asset sales were primarily used to retire debt. Additions to property and equipment totaled $6.9 million for 2004. Additions to property and equipment represent capital expenditures for refurbishing and renovating existing Inns. During the three-year period ended December 31, 2004, we spent an aggregate of approximately $17.8 million (approximately $6.9 million in 2004, $4.0 million in 2003 and $6.9 million in 2002), or 6% of hotel revenues, on capital improvements to our owned Inns. Other capital expenditures in 2003 and 2002 pertained to expansion.

We plan to spend approximately $14.0 million during 2005 on refurbishment and renovation projects of existing Inns. These capital expenditures are funded from operating cash flow, net proceeds from the disposition of hotels and possibly additional borrowings. The capital budget includes costs to convert several more of our Signature Inns to our more recognizable Jameson Inn brand. During the fourth quarter of 2004 and the first quarter of 2005, we have substantially completed the renovation and conversion of three Signature Inns to Jameson Inns. The cost for all three conversions is expected to total $3.8 million, which included the cost of significantly changing the exterior appearance of one of these Inns to reflect the Jameson Inn colonial style. Our plan is to renovate and convert 12 other Signature Inns over the next two to three years. The eight that we do not intend to convert are listed for sale and classified as discontinued operations. The remaining cost of the interior renovation and conversion program for the remaining 12 properties is expected to be $16.0 million, and will be completed over the next several years.

Financing Activities

Our net cash used in financing activities during 2004 totaled $21.4 million. This amount included our receipt of $77.0 million in net proceeds from the common stock equity offering in July 2004 and the use of $75.7 million for our preferred stock redemption in August 2004. This amount also included the payment of dividends of $6.0 million to preferred shareholders before the redemption, repayments of mortgage notes and related deferred finance costs net of proceeds from mortgage notes and line of credit borrowings of $6.1 million, and scheduled long-term debt payments of $10.5 million.

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At December 31, 2004, our outstanding indebtedness was approximately $197.8 million, substantially all of which was collateralized by 112 of our 113 owned Inns. The carrying value of our debt approximated its fair value. In addition, as of December 31, 2004, we had remaining availability of $3.5 million on a line of credit secured by all of our owned billboards. We also had remaining availability of $1.0 million on a line of credit secured by hotel current accounts receivable. Both lines of credit mature annually.

Current maturities at December 31, 2004 include: maturing mortgage loans totaling approximately $33.9 million secured by nineteen Inns; mortgage loans totaling approximately $6.0 million secured by letters of credit which expire in the next twelve months; and scheduled principal payments of approximately $10.1 million for the next twelve months. We were in technical violation of several covenants related to three loans secured by five Inns at year end; however, in March 2005 we received waivers from these lenders for those violations. Based on discussions with our lenders, we believe we can successfully extend maturities or obtain replacement financing as our mortgage indebtedness and lines of credit mature at satisfactory renewal terms. If we are unsuccessful in refinancing these obligations, we anticipate employing other available resources which include cash, proceeds from refinancing owned Inns with increased borrowing capacity or selling owned Inns to meet the required obligations. Additionally, we are using the proceeds from the Junior Subordinated Notes issued on March 15, 2005 in connection with the trust preferred financing to primarily retire current debt.

At December 31, 2004, approximately $171.6 million of our total $197.8 million in outstanding debt has interest rates that will adjust during the next 12 months as follows:

Our policy historically has been to finance all of the costs of developing new Inns and expanding existing Inns. However, as a result of the acquisition of Kitchin Hospitality and the redemption of our preferred stock, we expect to be able to fund a substantial amount of our future capital needs through internally generated cash flow. Nevertheless, incurring additional debt is likely to be a significant means of financing any substantial growth in the future.

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 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.

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 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.

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Contractual Obligations

The table below summarizes our significant contractual obligations and commitments as of December 31, 2004:

Inflation

Operators of hotels in general possess the ability to adjust room rates quickly. Nevertheless, competitive pressures have limited us in our ability to raise rates in the face of inflation.

Critical Accounting Policies

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

Impairment of Real Estate Assets

We evaluate the impairment of property and equipment and other long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002. SFAS No. 144 states that an impairment of long-lived assets has occurred whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured based on net, undiscounted expected cash flows. Impairment charges are recorded based upon the difference between the carrying value and the fair value of the asset. We review on a quarterly basis the carrying value of our property and equipment, in relation to historical results, current business conditions and known trends to identify indicators of impairment. If indicators of impairment are present, the expected future results of operations of the asset are projected based on the estimated future earnings before interest expenses, income taxes, depreciation and amortization. Growth assumptions are based on assumed future changes in the economy and changes in demand for lodging in the local markets. In the event assumptions used to perform our review are inappropriate, the carrying value of these properties and our operating results would be misstated.

SFAS No. 144 requires a long-lived asset, which is designated for sale, to be classified as “held for sale” in the period in which certain criteria are met. In addition, SFAS No. 144 also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported in discontinued operations. Discontinued operations exclude properties sold with franchise or other agreements which indicate the Company has some form of continuing involvement in the future cash flows of the disposed properties. For properties we consider held for sale, an impairment loss is recognized if the fair value of the property, less the estimated cost to sell, is less than the carrying amount of the asset. Held for sale assets are reported at the lower of the carrying amount or the estimated fair value, less the estimated cost to sell. Subsequent to the date that an asset is classified as held for sale, depreciation expense is not recorded. Losses recorded in 2004 and 2003 were related to properties sold or held for sale. In the event our estimates of net realizability of assets held for sale are inappropriate, the carrying value of these properties and operating results would be misstated.

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Accounting for Income Taxes

Effective January 1, 2004, we relinquished status as a REIT for federal income tax purposes and became a taxable corporation. As a REIT, we did not record income taxes or related deferred taxes for financial reporting purposes. A deferred tax benefit of approximately $1.4 million, net of a valuation allowance of $0.1 million, was recorded to establish the Company’s initial deferred tax asset resulting from the difference in basis of our assets and liabilities for financial reporting and income tax purposes as a result of the change in taxable status. An additional valuation allowance of approximately $6.0 million was recorded in 2004 based on our review of our estimate of realization of deferred tax assets. We have not recognized any income tax benefit for 2004 related to the taxable loss since we are uncertain whether there will be sufficient taxable income in future periods to allow for the utilization of the net deferred tax assets. We have based this decision on our cumulative history of losses in accordance with SFAS No. 109.

Overhead Allocation from Kitchin Hospitality

Historically, we reimbursed Kitchin Hospitality for overhead costs pursuant to a cost reimbursement agreement. Effective with the acquisition of Kitchin Hospitality on January 2, 2004, we are assuming the full cost of these general and administrative expenses. The overhead allocation pursuant to an agreement between us and Kitchin Hospitality involved a substantial number of estimates pertaining to the allocation between entities of employees’ time and various other costs. Kitchin Hospitality charged us approximately $1.8 million and $1.6 million in 2003 and 2002, respectively, for our portion of certain salaries, office overhead and other general and administrative costs pursuant to the agreement. In the event that the assumptions used to determine the overhead allocation were incorrect, we would not have expensed an appropriate amount for such services.

Investment in Real Estate Assets

Our management is required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful life. These assessments have a direct impact on our operating results. The estimated useful lives of our assets by class are as follows:

In the event that management uses inappropriate useful lives or methods for depreciation, our operating results would be misstated.

Recent Accounting Pronouncement

In December 2004, the FASB issued SFAS No. 123R (Revised 2004), Share-Based Payments. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on the fair value of the equity or liability instruments issued. SFAS No. 123R will require the Company to apply fair value recognition provisions to all unvested equity awards as of the first interim reporting period starting after June 15, 2005, which is the Company’s third quarter beginning July 1, 2005. The Company has begun an evaluation of the effects of SFAS No. 123R and expects to complete the analysis prior to the end of third quarter of 2005.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A significant portion of our existing indebtedness is subject to adjustable interest rates primarily with twelve month interest rate readjustment dates, and is secured by our Inns and billboards. Our costs of financing our

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floating rate debt may increase subject to events beyond our direct control. Our variable rate debt consists primarily of individual property mortgages that adjust one time per year at varying dates for a twelve month period following the interest rate adjustment date. A hypothetical 100 basis point change on January 1, 2004 in the indices underlying our floating rate debt would have changed our annual interest expense by approximately $2.1 million based on the weighted average borrowings subject to variable rates during 2004. However, the actual annual impact to interest expense would have been less than $2.1 million due to the various annual interest rate readjustment dates of our variable rate debt.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the fourth fiscal quarter of the fiscal year covered by this report on Form 10-K, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required to be contained in this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2005 annual meeting under the headings “Proposal One—Election of Directors,” “Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics.”

ITEM 11. EXECUTIVE COMPENSATION

The information required to be contained in this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2005 annual meeting under the heading “Executive Compensation.”

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required to be contained in this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2005 annual meeting under the heading “Principal Shareholders and Security Ownership of Management.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required to be contained in this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2005 annual meeting under the heading “Certain Relationships and Related Transactions.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required to be contained in this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2005 annual meeting under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm.”

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

        2. Financial Statement Schedule of Jameson Inns, Inc.

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